House of Commons Scottish Affairs Committee

Banking in Scotland

Second Report of Session 2009–10

Volume II

Oral and written evidence

Ordered by The House of Commons to be 24 February 2010

HC 70-II Incorporating HC 38 and HC 319, Session 2008-09 Published 17 March 2010 by authority of the House of Commons London: The Stationery Office Limited £0.00

The Scottish Affairs Committee

The Scottish Affairs Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Scotland Office (including (i) relations with the Scottish Parliament and (ii) administration and expenditure of the offices of the Advocate General for Scotland (but excluding individual cases and advice given within government by the Advocate General)).

Current membership Mr Mohammad Sarwar MP (Labour, Glasgow Central) (Chairman) Mr Alistair Carmichael MP (Liberal Democrat, Orkney and Shetland) Ms Katy Clark MP (Labour, North Ayrshire & Arran) Mr Ian Davidson MP (Labour, Glasgow South West) Mr Jim Devine MP (Independent, Livingston) Mr Jim McGovern MP (Labour, Dundee West) David Mundell MP (Conservative, Dumfriesshire, Clydesdale and Tweeddale) Lindsay Roy MP (Labour, Glenrothes) Mr Charles Walker MP (Conservative, Broxbourne) Mr Ben Wallace MP (Conservative, Lancaster & Wyre) Pete Wishart MP (Scottish National, Perth and North Perthshire)

The following members were also members of the committee during the Parliament:

Danny Alexander MP (Liberal Democrat, Inverness, Nairn, Badenoch & Strathspey) Gordon Banks MP (Labour, Ochil and South Perthshire) Mr David Hamilton MP (Labour, Midlothian) Mr John MacDougall MP (Labour, Glenrothes) Mr Angus MacNeil MP (Scottish National, Na h-Eileanan an Iar)

Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No. 152. These are available on the Internet via www.parliament.uk.

Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/scotaffcom.

Committee staff The current staff of the Committee are Nerys Welfoot (Clerk), Alison Groves (Second Clerk), Ameet Chudasama (Committee Assistant), Becky Crew (Committee Assistant), Karen Watling (Committee Assistant) and Tes Stranger (Committee Support Assistant).

Contacts All correspondence should be addressed to the Clerk of the Scottish Affairs Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6123; the Committee’s email address is [email protected].

Witnesses

Wednesday 10 December 2008 Page

Mr Ian McMillan, Director, CBI Scotland, Mr David Lonsdale, Assistant Director, CBI Scotland, Mr Garry Clark, Head of Policy and Public Affairs, Scottish Chambers of Commerce, Mr Graham Smith, General Secretary, Scottish Trades Union Congress, Mr Stephen Boyd, Assistant Secretary, Scottish Trades Union Congress and Professor David Bell, University of Stirling Ev 1

Wednesday 4 March 2009 Mr Stephen Boyd, Assistant Secretary, Scottish Trades Union Congress, Ms Wendy Dunsmore, National Secretary for Lloyds Banking Group, and Mr Rob McGregor, National Officer, Finance Sector, Unite the Union Ev 15 Mr Owen Kelly, Chief Executive, Scottish Financial Enterprise Ev 27

Wednesday 19 March 2009 Mr Gordon Pell, Deputy Group Chief Executive, Royal Bank of Scotland Group Ev 34 Mr Archie Kane, Group Executive Director, Scotland, Lloyds Banking Group Ev 53

Wednesday 25 November 2009 Mr Colin Borland, Public Affairs Manager, Federation of Small Businesses Ev 68 and Mr Norman Banski, Law Society of Scotland Mr Keith Dryburgh, Social Policy Officer, and Miss Vida Gow, Money Advice Ev 76 Coordinator, Citizens Advice Scotland

Wednesday 2 December 2009 Mr Stephen Boyd, Assistant Secretary, Scottish Trades Union Congress, Mr Rob MacGregor, National Officer, Finance and Legal Sector, and Ms Ev 82 Wendy Dunsmore, National Secretary for Lloyds Banking Group, Unite the Union Mr Stephen Hester, Group Chief Executive, Royal Bank of Scotland, Mr David Thorburn, Executive Director and Chief Operating Officer, Clydesdale Ev 90 Bank, and Mr Adrian Coles, Director General, Building Societies Association

Wednesday 9 December 2009 Mr Archie Kane, Group Executive Director, Insurance, Lloyds Banking Group Ev 105

Wednesday 13 January 2010 Lord Myners, a Member of the House of Lords, Financial Services Secretary, HM Treasury, and Mr Robin Haynes, Head of Financial Services, Scotland Ev 115 Office

List of written evidence

1 Building Societies Association Ev 148 2 CBI Scotland Ev 132 3 Chartered Institute of Housing Scotland Ev 124 4 Citizens Advice Scotland Evs 159, 168 5 Clydesdale Bank Ev 130 6 Federation of Small Businesses, Scotland Ev 145 7 HM Treasury Ev 166 8 Archie Kane, Group Executive Director, Lloyds Banking Group Ev 121 9 Law Society of Scotland Evs 141, 162, 164 10 Lloyds Banking Group Evs 143, 174 11 Lord Myners, Financial Services Secretary to HM Treasury Ev 166 12 Gordon Pell, Deputy Group Chief Executive, Royal Bank of Scotland Ev 120 13 Royal Bank of Scotland Group Evs 122, 128, 130, 156, 164 14 Scotland Office Ev 152 15 Scottish Trades Union Congress Ev 135 16 Unite the Union Evs 139, 166

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Scottish Affairs Committee: Evidence Ev 1 Oral evidence

Taken before the Scottish Affairs Committee on Wednesday 10 December 2008

Members present Mr Mohammad Sarwar, in the Chair

Mr Alistair Carmichael David Mundell Mr Ian Davidson Mr Charles Walker Mr Jim Devine Pete Wishart Mr Jim McGovern

Witnesses: Mr Iain McMillan, Director, CBI Scotland, Mr David Lonsdale, Assistant Director, CBI Scotland, Mr Garry Clark, Head of Policy and Public AVairs, Scottish Chambers of Commerce, Mr Graham Smith, General Secretary, Scottish Trades Union Congress, Mr Stephen Boyd, Assistant Secretary, Scottish Trades Union Congress and Professor David Bell, University of Stirling, gave evidence.

Q1 Chairman: Good afternoon. I would like to Those businesses are businesses of all sizes from the welcome all the witnesses to our session. Our very smallest to some of the very largest and also original plan was to take evidence separately but covering all parts of the country. We keep a strong members of the Committee felt that it would be focus on all areas of the economy. We are delighted appropriate to take evidence from all the witnesses as well to be here today. together. Would you like to introduce yourselves please for the record? Q4 Mr Davidson: Can I just ask a point of the Professor Bell: I am Professor David Bell from the Scottish Chambers of Commerce? Why is the University of Stirling Economics Department. material you produce so consistently and Mr Clark: My name is Garry Clark and I am Head unremittingly hostile to Westminster and to the of Policy and Public AVairs with the Scottish present British Government? Chambers of Commerce. Mr Clark: I do not believe that it is. Our purpose in Mr Lonsdale: I am David Lonsdale; I am Assistant the Scottish Chambers of Commerce is to represent Director of the CBI in Scotland. views of our members. Mr McMillan: Iain McMillan, Director, CBI Scotland. Q5 Mr Davidson: Are they all nationalists then? Mr Smith: Graham Smith, General Secretary of the There is an issue for me about the extent to which we Scottish TUC. take account of your evidence here given that you so Mr Boyd: Stephen Boyd, Assistant Secretary, obviously have form. There is a contrast between the STUC. stuV that you produce and the stuV that Liz Cameron produces. It is unfortunate that Liz is not Q2 Chairman: Before we start on the detailed here today because she always produces a much questions, perhaps you would like to make an more balanced account of events than you do. Can opening statement. you just clarify for me why that is? Mr McMillan: Just to say something about our Mr Clark: I do not think that is a fair representation organisation, Chairman. The CBI—the of the views of the Scottish Chambers of Commerce. Confederation of British Industry as it has been traditionally known—is a UK organisation. CBI Q6 Mr Davidson: Neither do I actually and that is Scotland is a part of that organisation and devotes why I wonder why it is coming across from yourself, its attention to matters of public policy and business but maybe we can just move on. advocacy here in London, in other parts of the UK Mr Smith: Perhaps I could introduce the Scottish and of course in Scotland and overseas. On behalf of TUC seeing as everybody else has introduced David and I, we take the work of this Committee themselves. The Scottish TUC is Scotland’s trades very seriously.It is good to be back. It is the first time union centre. We represent 39 trades unions who in 10 years since that other place opened 400 miles represent workers in all industries and occupations north, so thank you very much for inviting us to in Scotland; we represent 644,000 members in engage with you today. Scotland. We are delighted to be here to speak to the Committee about the current situation of the Q3 Chairman: Thank you for coming. Anybody Scottish economy. else? Mr Clark: If I could say a few words to introduce the Q7 Mr Walker: We ought to make sure that Scottish Chambers of Commerce, we represent some everyone has had a turn. Professor Bell? nine and a half thousand businesses in Scotland Professor Bell: I am simply here as a person with a divided through 20 local chambers of commerce longstanding interest in the Scottish economy and its from Wick to Wigtown as we like to say in Scotland. performance. I have no particular axe to grind. Processed: 12-03-2010 18:42:30 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG1

Ev 2 Scottish Affairs Committee: Evidence

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell

Q8 Chairman: I will start the questions. How do you UK Government in 2010–11 and that is going to think the Scottish economy is linked with the United create diYculties. The medium term that Iain was Kingdom economy as a whole? In your view, do you referring to there is really 2010–11; I think that is think there might be some changes because of the going to be a diYcult year for Scotland, certainly for current economic climate? the public sector and it will reduce demand and aVect Professor Bell: Can I say something quite brief? I the private sector as well. presume you are really talking about it in the context of the recession we are now facing. I have been looking at the way that unemployment has been Q10 Chairman: The Government has injected developing since the beginning of the year and it is billions of pounds to rescue the banks. Was that the quite interesting to notice that really Scotland and right decision by the Government? The business England are performing almost exactly the same in community and the people who have mortgages are terms of the increase in unemployment that they are finding that unfortunately the banks, building experiencing, whereas Wales is actually doing societies and financial institutions are not passing somewhat worse. In terms of things like the fall in that relief—the cut in interest rate—to the business house prices, Scotland is at the lower end of the community or to the people who have big decline in house prices in comparison with Northern mortgages. How do you think the government can Ireland where house prices have fallen by almost force these institutions to help the people from the 30% in the last 12 months. The decline in England building society and the people who lend money? has been somewhat larger than that in Scotland. I Mr McMillan: First of all the measures that the am sure we will come onto the financial services government has taken to rescue the financial system sector to which Scotland is particularly exposed in are probably about right in two respects: first of all, other respects perhaps also too because it has a injections of money to support the capital base of the reasonably large public sector and at times like these banks and also to inject liquidity into the system. that is an insurance in a sense from a huge drop in That was very important; it was the right thing to do. demand. So there are some plus factors at the I think it remains to be seen whether that is enough. moment as well as issues associated with the We hope it is. I think as far as lending to businesses financial services which we will come on to. and so on, we cannot ask the banks to repeat the Mr McMillan: I agree with David on that and I think mistakes of the past and therefore there needs to be that the numbers for economic growth in Scotland a balance struck between doing what is right for the and the UK this year are probably quite close. For business community and making sure that credit is example, we expect GDP for the UK to grow by readily available for companies whilst making sure 0.8% in 2008; we do not do a separate Scottish that lending is not foolhardy. I think it is a question breakdown of these figures, but Fraser of Allander, of balance, if I may say so. for example, expect the economy to grow by 0.7%, Mr Smith: Perhaps if I could take a step back and so the GDP growth this year is really quite close and respond to the initial question you asked about the certainly closer than any standard error in the Pre-Budget Report and the stimulus. Certainly our estimate which I think is consistent with David’s view was that we welcome the measures taken by the point on unemployment. Chancellor. There certainly was not an option to do nothing and what the Chancellor did we believe were bold steps that should have a very positive impact on Q9 Chairman: To what extent do you think the Pre- the Scottish economy. All the measures that were Budget Report and the fiscal stimulus will aid the introduced were perhaps not ones that we ourselves Scottish economy? had called for or indeed if we had had the powers Mr McMillan: I think two things, first of all it does ourselves to introduce measures they would not have appear that the Barnett consequentials are going to been the ones we would have chosen, but certainly bring some extra capital expenditure to Scotland. we believe they are ones which should have a positive We think it is a good thing provided the capital impact on the Scottish economy moving forward. In expenditure is devoted to improving the supply side relation to how the government can encourage of the economy.Obviously the Barnett works in both banks—if that is the right term to use—to improve directions and therefore the Chancellor of the lending back up to respectable levels, there is little Y Exchequer’s e ciency savings are going to work doubt that the key problem that is facing a number through the Barnett consequentials into Scotland as of businesses in Scotland is the ability to access well. On the one hand there will be a fiscal stimulus finance. We know from talking to a number of in the short term. Over the longer term then clearly companies in a number of sectors (for example in there is going to have to be some belt tightening. petrochemicals, in pharmaceuticals) they have fairly Professor Bell: What is happening is that, as a result healthy order books but the problem they have is of the extra capital spending in England and Wales, that they cannot access finance and where £160 million has been brought forward from companies are particularly highly leveraged then the 1 2010–11 into 2008–09 and 2009–10. There will be £5 cost of servicing the debt, because of the business Y billion worth of additional e ciency savings by the models that they have operated—there is a question about whether these where appropriate business 1 Note by witness: I was mistaken in stating that the extra capital spending in England and Wales would result in £160 models—they are being placed under significant million in Barnet consequentials. It is now my diYculties and potentially could result in significant understanding that the value will be £260 million. job loss in the future. However the government now Processed: 12-03-2010 18:42:30 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG1

Scottish Affairs Committee: Evidence Ev 3

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell holds important stakes in a number of banks and it to go into a debt much more severely than it already should use its stakeholdings in these banks to ensure appears to be doing. The question is really one of that the banks are lending to business. We also timing. When do you start to reduce the rate of believe that there is a role for government in perhaps growth in public spending so that, for example, the directly lending to business and as STUC we have debt to GDP ratio starts to come back down again? long advocated the creation of a Scottish investment It had been coming down; it has gone back up and it bank which would provide long term patient finance looks like it is going to go up quite significantly over to companies. One of the problems we have had we the next couple of years. It is a question of timing so believe not just in the Scottish economy but in the that you do not make a situation which is already British economy more generally is the inability—if diYcult worse when you start to implement these that is the right word to use—of financial institutions eYciencies in the public sector because they are to finance long term patient finance to companies to going to have to come eventually. allow companies to grow. We believe that is a market failure that government should act to address. Q13 Mr McGovern: Professor Bell says that the consequentials from the Pre-Budget Report for Q11 Pete Wishart: Can I just take you back to Scotland was £160 million. I was under the diYculties we will be having in the budget and of impression it was £260 million.2 course the next couple of years. Professor Bell Professor Bell: What I am talking about is the identifies that a cut in eYciency savings will come in amount of capital spending that the Scottish the region of £500 million in the first year and £500 Government is going to be able to bring forward million in the second year, a total of a billion pounds from the financial year 2010–11 into the current year worth of cuts to the Scottish block grant. I think and the next financial year and I think that is £160 Professor Bell identified this as a 3.4% contraction of million. the Scottish block grant and the impact on services is obviously going to be quite immense on the back Q14 Mr McGovern: I will certainly check my sources of all this. I just wonder if our guests here have any but I was definitely under the impression it is £260 idea about how these cuts are going to be million. I just wondered whether either Iain or implemented to the Scottish block grant, the impact Graham had a view on how John Swinney (the that this is going to have on the Scottish economy finance minister in the Scottish Executive who and what representations your organisations are welcomed the money) opted to use that money. I do prepared to make to the Treasury to ensure that not know if anybody here will be able confirm my Scotland is not going to be disproportionately hit by Y opinion that it is £260 million. this attempt at e ciency savings of up to a billion Mr McMillan: I thought it was £200 million. pounds in Scotland. Mr Lonsdale: I do not want to reveal a split in the Mr McMillan: The public finances need to be CBI but I thought it was £260 million as well. We brought into good order. The Chancellor expects the made a submission to the devolved administration in pubic sector net cash requirement to reach 57% of advance about some of the options they should take GDP within the next two to three years which is very with their budget and any windfalls they would get high. Measures to reduce that ratio are needed. through the Pre-Budget Report. One of the headline Nobody can pretend that that is going to be easy. As issues from that was to look very closely at all their far as Scotland is concerned, I hear what you say expenditure, particularly on the capital side and about it being disproportionately hit. My accelerate what they can. When that announcement understanding is that if Barnett works in the way was made we strongly welcomed it. The proviso in that it should work then it will not be our submission was of course that it is spending that disproportionately hit but I am not sure how you could help productivity and help the economy, not come to the premise behind your question there. just advance and accelerate any spending within the Perhaps you could help me with that. devolved government’s remit. I have not studied Mr Swinney’s statement in detail but my understanding Q12 Chairman: Professor Bell, will you be able to is that it is on skills building, transport infrastructure help? and related items like that. That is something we Professor Bell: I will try. I do not think Scotland will called for in advance and we support. One of the be disproportionately hit in so far as the way the concerns we have is that although capital spend has Barnett works in this respect. It all depends how the been accelerated at a UK level actually when you Chancellor decides to implement the £5 billion look down the line several years it is not just a case eYciency savings that were talked about in the Pre- of taking from then to now, it is actually going to be Budget Report. It will depend whether these fall slightly less in future, but I guess that is part of trying disproportionately on areas where Scotland has a to repair the public finances at a UK level. devolved power and we do not know the answer to Mr Boyd: Could I go back to the previous question. I that question yet. I suspect it will be broadly in line think it was entirely right that when the Chancellor with government spending in which case that overall was setting out his Pre-Budget Report that he should £500 million figure will be about right, but I do not set out in the longer term how we wish to pay for that. think that that will be disproportionate. That is just I think we need to recognise that there are options the way the Barnett formula works. Then the question is, as Iain points out, the UK cannot aVord 2 See footnote 1 Processed: 12-03-2010 18:42:30 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG1

Ev 4 Scottish Affairs Committee: Evidence

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell there about how he chooses to pay for it; it is not all unusual. We have had reports of that coming in from public sector eYciency. We very much welcome the Thurso, we have had reports coming in from Mid- change in direction set by the new higher rate of tax Lothian, West-Lothian, Glasgow, Dundee, but I think we have to realise that there is still a way to Aberdeen, right across the country. We have one gointhatparticularissue.ThistimelastyeartheTUC business, for example, where they had a half million published their report where the estimated tax gap in pound loan of which £40,000 was outstanding. That the UK tax that was avoided by the super bill for the was then called back in by the bank for reassessment individuals and some of the UK’s biggest and an additional £55,000 was added onto the corporations through evasion or avoidance was at repayment, more than doubling what was already £26 billion. The Treasury have since suggested the there. figure might be approaching £40 billion. So I think it Y is not all about public sector e ciency here; there are Q16 Mr Carmichael: Given that this is essentially a other ways in which you can try and get the public contractual relationship between two private finances back in order. However, on the specific point businesseswhatcangovernmentsactuallydotoeVect Y of the public sector e ciencies, Graham has already some meaningful solution to this? It is pretty clear said that the STUC welcomed the PBR package as a that Alistair Darling making speeches saying, “If you whole but we do have some concerns about what this keep doing this I’m going to get very, very cross” just is going to mean for Scotland and we will be speaking is not going to cut it. to both the Treasury and the Scottish Government Mr Clark: I think what is ultimately going to be the about how this is looking forward; it is one element of deciding factor in this is the restoration of a wider package which we did support. I think competition back into our retail banking sector and Professor Bell has already made the point about the that is a very diYcult solution to achieve. payment here. Given the extent of the recession that Mr Carmichael: Do you think a Lloyds TSB/HBOS we might be facing 2010 might be quite early. merger will help that?

Q15 Mr Carmichael: I was struck by what Iain Q17 Chairman:The banksare clearlytelling peoplein McMillan said about not wanting banks to repeat the the business community—the people who have mistakes of the past which I think is a proposition spoken to me—that even with a reduction of interest which very few of us would disagree with. My rate to 2% they are not willing to come less than 5% or impression though is that businesses in my 6%. What is the benefit to the business with the constituency, which are predominantly SMEs,3 were reduction of interest rates and, on the other hand, the not part of the mistakes the banks made in the past. people who are small depositors, they are losing out The mistake the banks made in the past was getting because they are getting hammered. What can the involved in silly money; lending to SMEs was not members of the Scottish AVairs Select Committee really part of the problem. That notwithstanding, it is and MPs do to name them and shame them? What the SMEs in my constituency that are now being else can be done? Obviously it is very disturbing when made to pay for the recapitalisation of the banks who it is brought to ournotice that financial institutions— are trying to get their balance sheets back in order in a banks, building societies—are charging the most way which is seriously damaging to a number of local vulnerable in our communities up to 300% and in fact businesses. I spoke to one retailer last week who had in some cases up to 1000%. How can the government just renegotiated her overdraft facility with HBOS deal with this situation? (this was at the end of a normal two year cycle that Professor Bell: I do think it is extremely diYcult every business goes through) and HBOS insisted that because of course the banks in a sense hold a gun to her new interest rate would be another 1% above base the government’s head because if they fold over then and the arrangement fee, so-called, was to be we have chaos, but it does seem to me that maybe the increased by a further 0.25% of the total lending. This government will have to take one more step and that was for a perfectly routine business transaction. That is to some extent to guarantee lending between is HBOS putting the cost onto a small business which businesses and banks. That might not be too costly a is in a sector which is going to be challenged in an route to go down and I think it would certainly be economic downturn. That is my perspective as a worth looking into at the moment. constituency member from a part of the country which is not perhaps typical of the rest of the country. Q18 Mr Walker: Stephen Boyd suggested that From your point of view,Iain, from the CBI and from although the top rate of tax has gone up to 45% there your point of view, Garry, from the Chambers who I might be room to increase taxation. I think I am right think probably have more SMEs than the CBI, is that in believing that the Scottish Parliament Executive something that has been found across the country? has the right to vary taxation by three pence in the Mr Clark: That is a very familiar picture you have pound. Do you think that if there is a need to push up painted there. We have been speaking to businesses public expenditure to get public works happening right across the country and the question of overdraft that there is a case to be made to the Scottish facilities going up by one or even one and a half Executivetoactuallystartusing thispowerinthearea percentage points above base over and above what of taxation? they are already paying above base has not been Mr Boyd: It is not what I would start from. I think what we need is a fundamental overhaul of the 3 Small or Medium-sized Enterprises taxation framework in the UK at this moment in Processed: 12-03-2010 18:42:30 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG1

Scottish Affairs Committee: Evidence Ev 5

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell time. We have a situation where the lowest paid in anything between £20 and £30 million.4 We have not society pay a greater proportion of their income in seen any estimated cost to business from using the taxation than the wealthiest. I think this is tartan tax in recent years. unsustainable. As I have already said, a third of the Mr McMillan: No we have not, and these costs top 700 companies paid no corporation tax would also fall on the public sector because it is whatsoever in the last financial year and I think we around employment and making adjustments to the need a fundamental overhaul. If this is forthcoming PAYE system. then I think the tax take will increase. We are not starting at the point of looking at the taxation rules Q21 Mr Walker: In what circumstances could you of the Scottish Government. I think that gets us into see this tax raising power being deployed? Professor a completely diVerent question about the financing Bell, you are an academic and tend to rise above the of devolution; that is a very appropriate debate to be politics of this, in what circumstances would you see had at this time and it is one that we are participating it being deployed? in through the Calman Commission and the Scottish Professor Bell: I think it could only be deployed Government’s National Conversation and it is one upwards. If Scotland unilaterally decided to cut where we are developing a position but we are not at income tax you would find that the Treasury would a stage yet to give you a comprehensive overview of pretty much, pound for pound, cut the block grant what that position will be, but we think that the to Scotland on the argument that you must have position we come to on this is going to be very enough money if you are able to cut tax. There has important for Scotland’s constitutional future and it never been a consensus within Scotland that it is one that we are taking a time to come to a true and should be raised. Clearly it can’t be a solution to the present problem because what you need is increased considered position and how we believe devolution Z should be financed. demand and all you would do is to reshu e some demand. This would add to the public sector coVers and make Scotland even more dependent on the Q19 Mr Walker: Today we are discussing Scotland. public sector. There has never been an appetite for We have Scottish Trades Union Congress, we have that. I can speculate on the reasons why that is the Scottish CBI, we have Scottish Chambers of case and of course there are economic arguments Commerce and we have a Scottish academic and why you might feel it would cause the Scottish within Scotland there is the power to increase economy to become uncompetitive. taxation. I still am searching for an answer on this. With that power why would you not, if you felt it Q22 Mr Walker: If there is a shortfall in the block could alleviate some of the pressures in Scotland, ask grant and there is a debate to be had about how to the Executive to levy increased taxes? fill that shortfall, surely raising taxes should be part Mr Smith: I think we just gave you the answer to of that debate if that power exists in Scotland. that. If that is a power to be exercised it will be Professor Bell: It should be part of the debate; I do exercised in the context of a more fundamental not disagree with that at all. The power is there; it has assessment and overhaul of both the UK taxation never been used. system and the nature of funding of the devolved Q23 Mr Carmichael: Can I pick up on the point Scottish Government. We gave you the answer. about tax cuts in Scotland bringing with it the consequential reduction in the block grant? I do not Q20 Mr Walker: I do not think you did. Can quite follow your thinking here. We have the the tax somebody else try to answer it? varying powers for the Scottish Parliament set up in Mr Lonsdale: Certainly from our members’ the Scotland Act. We have the Barnett formula. The perspective we have looked at this issue of using the two stand independently of each other. It would tartan tax where we can reduce it by up to three actually be a bold Treasury minister that would say, pence in the pound or increase it by up to three pence “Actually we are going to disregard the terms of the in the pound. The arguments are actually quite Scotland Act and we will force the right of the similar on the issue of the proposed local income tax Scottish people to exercise the powers that north of the border. Firstly it would add a Westminster has given them”. Why is it you say that if we put tax in Scotland up it would reduce tremendous amount of cost to business and secondly V the complexity would add to business. There are competitiveness but there would be no e ects from bringing it down? other questions as to the public spending or the Professor Bell: I think it is asymmetric in a sense. taxed income that the devolved government would The Barnett formula is not enshrined in law. It is just forego and what might that come from which is by convention that the Treasury allocates the so- allied to the question from earlier on about public called consequentials to Scotland. We had the Carter spending and what it is being used on. We have some review of prisons last year and the Treasury decided very deep reservations about that agenda with its to fund that out of the UK reserve. Anything that is costs and complexities. The Burt Commission funded out of the UK reserve does not have a published a report two years ago looking at the issue Barnett consequential although clearly prisons of local income tax and they said at that time that the upfront cost to business would be up to £60 million 4 Note by witness: Sir Peter Burt was appointed by the and the on-going costs to business would be previous Scottish Executive. Processed: 12-03-2010 18:42:30 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG1

Ev 6 Scottish Affairs Committee: Evidence

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell occur on both sides of the border. If, let us say, the Chambers. I met with my local chamber just last Scotland cuts the level of income tax I do not take week to discuss this very issue and what I discovered the view that the Treasury will just carry on applying from my conversation is that this is a very welcome the Barnett formula in a dispassionate way and not measure for small businesses which has greatly take any regard of the fact that Scotland has enough assisted and seen them through some of the worst money and can apparently aVord to cut income tax. aspects of the particular economic downturn. Could I ask you to compare and contrast that with the key Q24 Mr Carmichael: The whole point of having a features of the Pre-Budget Report which was a two Scottish Parliament and giving it a tax varying and half pence reduction on VAT and the impact power is that these are things that you can decide for that that is having on the high street and retail and yourselves. It would be brave of Treasury to turn SMEs. How do these equate in value to your round and say, “Well actually we’ve changed our members and to your organisations? minds, you can’t”. Do you not think there is a case Mr Clark: I think certainly the small business bonus for the Scottish Parliament to say, “Here is an scheme was very warmly welcomed by many of our opportunity to give Scotland a distinctive members who benefited significantly by it and who competitive edge compared to the rest of the United will benefit to a greater extent next year when the Kingdom”? I thought your analysis of the Pre- scheme comes into full force. I think it is important Budget Report was pretty grey. It was Stephen who to view both that and the Pre-Budget Report as parts said that this was a package was bold; I did not think of larger packages of measures which both it was bold at all, I thought it was a passive mix of a governments are bringing forward. Looking at the fiver here, three quid there, four quid here and we VAT as an example, that is something which many will have eight quid back, tax cuts, some tax credits of our members responded to actually fairly and we will increase national insurance negatively at first in that it was costing them money contributions. Here would be an opportunity for the to change it in some circumstances. However, Scottish Government to say, “There you go, money obviously, as part of a package which is designed to back in your pockets, go and spend it”. restore confidence to both consumers and Mr McMillan: I think that is happening. If my businesses, it has to be viewed as a step towards understanding is correct I think that north of the achieving that. Certainly the small business bonus border the Liberal Democrats do want to invoke the scheme north of the border is equally another tax varying power and cut the basic rate by two massive step towards ensuring that small businesses pence in the pound. We have seen that in the past. If benefit at a time when things can be very diYcult for I recall correctly I think the SNP in 1999 had a a number of them. manifesto commitment to increase the varying tax Mr Smith: I am not surprised that small businesses by one penny in the pound. I think the debate is thought that the small business bonus was a good there. It maybe an idea if somebody, perhaps one of thing. I am not sure that everybody else in the your clerks, could research the Treasury rules on this economy reckoned it was a good thing as we have treatment of the use of the tax varying power. My seen no evidence to demonstrate that it is going to understanding originally when the Scotland Act have any impact on jobs whatsoever. We consistently entered the Statute Book was that if the tax was asked the Scottish Government to produce that increased then the Scottish revenue was increased by evidence and that evidence has not been the amount of tax raised and if it was cut then the forthcoming. We are reassured by ministers in the Scottish authorities lost the tax forgone. What Scottish Government that that will be forthcoming Professor Bell is indicating is that that may have but we are waiting to see whether that happens. I changed and it would be worth looking at that. think governments make political choices about how they spend money. There is no evidence, as I have said, that spending the money that the Scottish Q25 Mr Carmichael: The 1999 Concordat must Government spent on the small business bonus will surely be in there at least. have any impact at all on jobs. It is not tied into jobs; Professor Bell: Can I throw a further fly into the it is not tied into training investment; it is not tied ointment? I was at a very interesting seminar a into investment in research and development or in couple of days ago at Glasgow University where a plant and machinery. At the same time that the professor of law from Glasgow discussed the issue of Scottish Government has provided a small bounty whether sub-national governments within the to small businesses it has cut the budgets of its European Union do have the powers to change taxes. There is a decision coming up on 18 December enterprise agencies which will consistently fall over in relation to the Azores and whether corporation the next three years. Our view is that that money tax and various other taxes can be cut there or could have been better used to boost jobs, training whether that is in fact a state aid. That may have a and investment and the Scottish economy rather bearing eventually on what is feasible in Scotland. than handing a very modest amount to small businesses which, as I say, has no evidential base in terms of its overall impact on the Scottish economy. Q26 Pete Wishart: That is a diVerent question and we probably recognise today the Scottish Finance Committee all but passed the Scottish budget for Q27 David Mundell: I would like to start by saying next year and one of the features of that again was a that I fundamentally disagree with what Mr small business bonus. 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Scottish Affairs Committee: Evidence Ev 7

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell in relation to the Scottish Chambers of Commerce. Professor Bell: I do not think there are short term I have never found any material that they have measures. What I should have added to my last produced—or indeed any of the organisations answer is that within Scotland unemployment is present—to be politically biased. Following up on rising at the same rate in Glasgow, Edinburgh, the discussion we have had about using the tax Aberdeen and Dundee; there are not pockets where varying powers to reduce income tax in Scotland and increases have been dramatic, so any solutions are in listening to what Alistair was saying, I am very a sense for all of Scotland. If you want bespoke interested to see what proposals the Liberal measures then I think really there are supply side Democrats do bring forward in the Scottish measures. They are addressing the long term Parliament to fund the two pence cut in income tax. problems which the Scottish economy has had which That is a legitimate point to make. Returning to the are lack of productivity which in turn is partly the wider point that Professor Bell was making earlier, result of low levels of innovation, poor levels of what is the divergence between the Scottish research and development and not enough capital economic situation and the UK situation? How expenditure. I do not think there is a short run marked is it and therefore how bespoke do measures demand twist which particularly could be focussed need to be in Scotland? on Scotland. Professor Bell: Historically, when Scotland had a V much larger manufacturing sector of a di erent Q30 Mr Walker: I would have thought—and now complexion from other parts of the United obviously mistakenly—that where you have higher Kingdom, it was often the case that Scotland lagged levels of public sector employment the growth in behind the rest of the United Kingdom in going into unemployment would be slower in the early stages of recession and also lagged behind them coming out. recession because governments, quite rightly, are Looking at the data so far, this recession has come V reluctant to let people go and of course in times of from quite a di erent source. It is really because of rising unemployment you sometimes need more the squeeze on credit and what has happened is that people working in parts of the public sector. It seems Scotland and the rest of the UK have turned very strange that it is happening this way. Have you together into recession in terms of the any idea why that is? unemployment figures which moved up in exactly Professor Bell: Scotland does have a bigger public the same month. Scotland and England have sector but it is not massively bigger than the rest of experienced exactly the same percentage increase in the United Kingdom; it is not massively bigger than unemployment between January and October of this the north of England, for example. If you take the year. As I said earlier, Wales has done worse than north-east of England the public sector there is at Scotland, but Scotland and England, it looks to me, least as big as it is in Scotland. I am at a loss to give are pretty much moving in tandem. I have heard it you a clear explanation as to why unemployment in argued by the Local Government Association that the South East has grown less rapidly than it has in the towns in the north of England will be in a better other parts of the country. position and more robust to weather this recession. When you look at the facts, they are not doing any better in terms of the increase in unemployment than Q31 Mr Walker: Does the TUC think that the other parts of the United Kingdom. Unemployment private sector is being hit slightly harder in Scotland is increasing more slowly in London. That is counter than it is south of the border? What is your thinking to the kinds of stories that are being told. One on this? Again, what does the CBI think? interesting area which also aVects Scotland is Mr Boyd: Can I make a general point first oV?I migration and the extent to which maybe the think far too much political and intellectual capital increase in unemployment in London is so small is spent in Scotland trying to measure whether or not because a large number of migrants have moved we are doing marginally better or marginally worse back to their place of origin because they have lost than the UK as a whole. I think at this moment we their jobs. are focussed in Scotland doing the best that we can and focussing energies on that. From talking to colleagues in the TUC—I sit on the TUC’s regional Q28 David Mundell: Is there any substantive development network so I sit alongside all the other evidence on that? representatives from the other unions—the Professor Bell: Not on the migration figures; the Y developments in the Scottish economy I see as migration figures are pretty unreliable so it is di cult running, as the Professor has explained, in a very to make a definite conclusion but it is very similar trajectory to those in England and it is the interesting that the increase in unemployment in same industrial sectors that have been hit. London has been much smaller than in any other Mr McMillan: When we look at our industrial major city in the UK. trends surveys which come out every quarter the results for Scotland and the rest of the UK are not Q29 David Mundell: Coming onto the second point dissimilar. However, what I would say is—I think I would like the organisations to address, are there this is very similar to what David said—that bespoke measures for Scotland which the Scotland as a manufacturing part of the UK has Westminster Government could take or the Scottish changed out of all recognition in the past decade. Government could be encouraged to take that Not only does manufacturing occupy a smaller would, specifically in Scotland, make a diVerence? proportion of the economy, but until probably two Processed: 12-03-2010 18:42:30 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG1

Ev 8 Scottish Affairs Committee: Evidence

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell quarters ago it was remarkably resilient to some of disconcerted when, earlier this week, I read that the the pressures it was under in terms of high costs of Secretary of State for Scotland was going to set up oil, high costs of commodity input prices and other his own council of economic advisors when the First costs out of their control. It might suggest that that Minister has a council of economic advisors. Do you journey from large commodity, low margin share my concern that we are perhaps heading in the manufacturing to the higher value is well under way. wrong direction here? Rather than the possibility of working arrangements between the Scotland Q32 Mr Walker: Do you see the trends diverging? Government and the UK Government on You say that right now unemployment trends and Scotland’s economy, we are actually going to have employment trends are going on a similar parallel; in divergent opinions and in fact we are not going to get a year’s time do you see a divergence? Do you see a definitive answer to Scotland’s economy but we are any stresses and pressures in Scotland that would just going to get more of the same bickering between make it worse or indeed make a recession less harsh London and Scotland which has been the norm in in Scotland? recent years? Mr McMillan: I compared and contrasted our Mr Smith: Both Iain and myself welcomed the fact estimate of GDP for this year with the Fraser of that we had had the opportunity to have that Allander estimate for Scotland. We estimate real discussion with the Secretary of State and with the GDP for the UK will drop by 1.7% next year and First Minister and look forward to having further then grow by 1.2% in 2010. If you contrast that with dialogue. It was certainly our view that having the Fraser of Allander they have a shallower drop next trades unions and one of the key employers year of 1.1 compared with the UK’s 1.7 but then less organisations sitting with governments both north growth in 2011, so 0.7 against our 1.2 for the UK. It and south of the border talking about some of the may be that Scotland’s recession might be shallower key challenges facing the Scottish economy was and not longer but the climb out from recession something that was welcome and we look forward to might take just a little longer. You are talking about having further discussions of that nature. I have not quite small diVerences and big numbers here but seen details of the Secretary of State for Scotland’s they are the best we have. plans on having a council of economic advisors. Perhaps he was given some advice in that regard and Q33 Mr Carmichael: That interesting forecast takes certainly we go down the first road as the First us into 2011 which is three years away. Who amongst Minister’s council of economic advisors and you in 2005 was predicting that we would be where certainly a reflection on what that council produced by way of an annual report was disappointing to say we are today? V Professor Bell: I was in the Fraser of Allander the least in terms of what it o ered as possible Institute when it was set up but in the mid-1980s I solutions to tackling some of Scotland’s not just had given up economic forecasting. That was a very immediate economic challenges but longer term wise decision that I made. economic challenges. Frankly the issues that were being presented as solutions by that council were issues that have been debated in Scotland amongst Q34 Mr Walker: Mr Boyd, you wanted to say the stakeholder organisations (ourselves, the CBI something. and other employers’ organisations) and Mr Boyd: The point I was going to make was that we government for some time. If the Secretary of State are talking about the Scottish and UK economies is thinking about having his own council then following similar trajectories at this moment in time. certainly having one which is significantly diVerent I think we have to bear in mind that the figures do in remit and composition from the one the First not yet reflect any contraction in consolidation in the Minister has would be, in my view, advisable. financial services sector post the banking crisis. It Whether or not the principle of it is of value is will be interesting to see how that all pans out over another debate altogether. the coming year. You asked who was predicting this Mr McMillan: I think I would agree with that. I crisis in 2005, I certainly would not lay claim to any think the Secretary of State would have to be asked great Nostradamus type claims, the actual detail of himself as to the objectives of his new body. My what has transpired over the last year, but we were understanding from what I have read is that this is certainly warning of the dangers of de-regulation in not another economic advisory council of the shape financial services for the best part of the last decade. and form of the Scottish Government’s, but it is The growth in household debt and company debt there to do something else around issues of poverty over the last decade we have long argued that it was which are very important as well. I am not as gloomy not sustainable and was bound to bite eventually. as Graham is. What the council of economic advisors recommended is very similar to what Q35 David Mundell: As well as going back to the mainstream business organisations like the CBI have question that Professor Bell answered which I think been calling for. When the council of economic everyone has touched on, it is a case of additionality advisors appear to endorse what we have been in terms of anything bespoke that could be done in calling for, we take that with gratitude. Scotland. I was quite encouraged earlier this year when the Secretary of State for Scotland and the Q36 Mr Davidson: I apologise if some of these points First Minister got at least some of you round the have been covered because I have had to go out. My table together for a discussion. I was a bit constituency is actually one of the constituencies Processed: 12-03-2010 18:42:30 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG1

Scottish Affairs Committee: Evidence Ev 9

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell which has still got a fall in unemployment and part spend than to save. I wondered whether or not you of it comes back to the question of manufacturing had any information that would back up my and part of it is obviously because of Ministry of prejudices. Defence orders coming to the ship yards in Mr McMillan: I do not think I have any solid particular. I wondered, because of that, whether or information that I could give you on that just now not you thought that so much of Scottish but I think in terms of economic theory certainly it manufacturing being involved with the defence is not a zero sum game and that kind of development industry was likely to act as a pendulum, a is part of growing the economy. You are right, it puts momentum that is going to keep things a bit more earning power into people’s pockets and that is the stable. As to migrants, there was always a virtuous circle of economic growth. disproportionately large number of migrants Mr Lonsdale: It is a model that is becoming more coming to my constituency because they were prevalent. If you look at the new urban regeneration competing for low wage jobs and a lot of them have companies in Scotland, they are looking to have an now gone home. Silverburn, the development, where aspect of this in what they do. Glasgow City Council there was a deliberate focus on making sure that have divided their area up into five or six diVerent locals got into jobs, has actually made quite a areas and are trying to maximise the opportunities diVerence. I wonder if I could have your from new development for local people to get those observations firstly on the point about the military jobs. It is something that is out there and is actually and secondly the extent to which having intensive happening on quite a regular basis but certainly I eVorts to get local people into jobs could in a sense would go with Iain’s points about the risks involved. help keep the unemployment figures lower than they Mr Boyd: I would just like to endorse Iain’s might otherwise have been, or is that just simply comments on the importance of the military displacing others? procurement. The Defence Department procured Mr McMillan: I think your first point, Ian, is a very jobs in Glasgow manufacture, in fact I would go good one because certainly the defence industry is even further and quote his boss Richard Lambert hugely important to manufacturing in Scotland for who, over the course of the summer, referred to a number of reasons, not just for the defence of the manufacturing as being a force for social cohesion in country but also the jobs there, particularly a way that services are not. I do not think you can nowadays, are very high value add jobs. Ship design underestimate the importance of those well-paid and and ship manufacturing is very advanced skilled jobs in places like Glasgow shipyards et manufacturing nowadays. You will know better cetera. They are of absolutely fundamental than me the qualities of the Type 45 destroyer that is importance to the local economy. Today we have being built in your constituency, the two aircraft discussed in the main how we can address the carriers will follow that and then there will be other recession that is on us in the short term. I think we replacement programmes for surface ships and so have to be looking forward to how we come out of on. I think they are very important to Scotland and this recession and how we re-balance the economy of course very important to your own constituency. moving forward. I think there is much more that can On the other point about employing local people, be done at Scottish and UK levels to boost manufacturing industry. We have had reasonably you mentioned Silverburn. Silverburn is just a productive discussions with Scottish ministers about fabulous facility out there in Pollock. If that is this, about Scottish investment bank and additional employing local people and giving them earning support for the manufacturing advisory service. The power and getting them jobs, then good, I agree. second issue about procurement and local jobs, I However, I would not necessarily go so far as to say concur with the views absolutely. We have a that we must ring fence this area and anybody longstanding dialogue with the Scottish outside it should not be capable of being employed Government about these issues and I have to say we there. come up against institutional fear towards all things European and the possibility that stipulating that Q37 Mr Davidson: You do not stand for election jobs must be safeguarded for local people is possibly there. infracting European legislation and therefore there is Mr McMillan: Absolutely, I do not have that a sort of reticence at all levels of the government advantage, but it is a fair point and it is a good about perhaps being bold in this area. There is a lot facility. of good work going on. You have mentioned Silverburn and there are others. There is a lot of good practice and good jobs in the local community. Q38 Mr Davidson: Do you think that those sorts of I think the benefit for those areas is very, very eVorts simply result in displacement or is there any tangible. overall benefit? Our view to some extent is actually Mr Smith: To add one very quick point about a net gain because you have got people earning and procurement and the role it plays, it is not just the generating money in a community who would not creation of jobs and procurement and that lever otherwise do so whereas if they were all in other should be used to improve access to training. That is areas then it would not necessarily spill over, something that government could do at a time of particularly as so many of them are relatively low recession, when employers may well seek to cut income communities, they are much more likely to training budgets, and use procurement as a way of Processed: 12-03-2010 18:42:30 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG1

Ev 10 Scottish Affairs Committee: Evidence

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell encouraging employers to continue invest in training Mr Smith: Certainly the feedback we have had I think would be good short term sense and good from our union aYliates is that they are having a long term sense. dialogue with the employers about these issues. Mr Davidson: I think it would be helpful if we got Obviously there is an on-going dialogue about the a brief note from the STUC in addition to what HBOS/TSB merger which is important, but I think they have said here about how in fact we could use on an on-going basis unions are talking to procurement to encourage employers to invest in employers not just in the financial services sector training. That would be very helpful to us. but across the economy about how to handle redundancies when they arise and also, more Q39 Mr Walker: What is the scale of potential fall importantly, to try to prevent redundancies arising out from the problems in the financial service in the first place. industry? How many jobs potentially are at risk? Mr McMillan: Certainly as banks and other Q43 Mr Walker: Many of these will be highly financial services organisations try and rebuild skilled people. profitability they will seek to improve their business Mr Smith: Absolutely. models and their eYciency. That generally does result in a reduction in head count. What will happen in Scotland? I do not know. The leaders of Q44 Mr Walker: It would be a shame to lose the banking industry in Scotland have been asked those skills. V this question and at this stage they claim not to Mr Lonsdale: There are e orts to try to improve know in terms of broad order of magnitude either. the attraction of the financial services sector in I think there will be some job losses undoubtedly Scotland, to improve the level of skills north of the 5 but I would not want to tempt fate by trying to border. I do not know whether the STUC are quantify it at this stage. involved in that in any particular way, but there are initiatives there. There is obviously some doom and gloom about jobs and there is a serious look at Q40 Mr Walker: It is significant. trying to improve the situation for the medium and Mr McMillan: It could be significant. long term. Mr Lonsdale: It is unreasonable to think that financial services will make the same contribution to economic growth in Scotland as it has in the past Q45 Mr Davidson: Can I just clarify whether or not and that may explain why Fraser of Allander and you think the current diYculties in the financial presumably Professor Bell are even more cautious sector are likely to increase or decrease the amount in their forecast for the uptick in the next four or of oVshoring that there has been? Clearly if five years. oVshoring were reduced substantially that would go Mr Clark: As has been mentioned already, so far some way towards mitigating job losses in we have not really seen the real eVects of what has Scotland, but I am not clear what the evidence is. been happening in the financial services sector and Mr McMillan: I am not sure. I am not familiar what may happen over the next year and feed into enough with the bank’s business model in detail to figures such as unemployment, such as GDP be able to answer that question I am afraid. growth figures in a way we have done, for example, Professor Bell: I do think the oVshoring activities for the construction sector in Scotland. It is very have been going back and forward as diVerent diYcult to estimate what the overall eVect will companies have found the oVshore centre to be up ultimately be. to scratch or not. Of course the reduction in the value of the pound will to some extent help with Q41 Mr Walker: Would you agree with me that it the competitiveness. is important that Edinburgh retains its position as a major financial services centre in Scotland. Q46 Mr Davidson: Is there any evidence as yet. Mr Clark: Absolutely, for many reasons and Professor Bell: No, there is no evidence as yet. particularly because there is such a high concentration of key skills in Edinburgh, in the Lothians and in Glasgow and other parts of Q47 Mr Carmichael: Can I pick up the point that Scotland as well in the financial sector. It is Stephen made about having to look to the future important to retain these high quality jobs which shape of the Scottish economy. My concern about are making a huge contribution. HBOS is more than the loss of jobs from the banks, significant though that is going to be. It is about what shape of banking industry/financial services Q42 Mr Walker: I have a question for the TUC: industry we have in Scotland when we eventually are the employers, ie the banks, talking to you? Are come out the other end of this recession which they involving you in discussions? I imagine many inevitably—hopefully—we will. What impact do of your members are very concerned about their you think having this behemoth bank of Lloyds future employment in these institutions with TSB/HBOS is going to be on competitiveness in the mergers, acquisitions et cetera. Do you feel that people are actually engaging with you as well 5 Note by witness: I refer to eVorts such as the Financial because there is a big piece of work to be done here Services Skills Gateway initiative led by CBI Scotland’s regardless of what happens? Chairman. Processed: 12-03-2010 18:42:30 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG1

Scottish Affairs Committee: Evidence Ev 11

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell banking sector? How do you think that is going to very low level of retained profits in the UK firms by impact on your business members in the CBI and retaining profits low because investment risings are the Scottish Chambers? so short because the cost of the capital is so large. If Mr McMillan: I think that clearly there is going to we can address these types of measures and if we can be one less high street bank if on Friday the HBOS regulate finance in order that it is far more shareholders vote in favour of the merger. However, supportive of this long term patient funding of our it does seem to me that there is quite a lot of growing companies then I think the real economy competition there, certainly in the big cities. There is will benefit substantially in the longer term. still the Royal, there is the Clydesdale, there are some Chairman: I believe one of our witnesses, Professor other banks there as well. As far as jobs are Bell, has to leave. Thank you very much for concerned, I think it is probably worth looking at the attending here today. public statements of Eric Daniels, the Group Chief Executive of Lloyd TSB who has said that it is not possible to quantify job losses at the present time but Q51 Mr Davidson: Following on the point about he has also said that he thinks that some of the banks, we have heard a lot—indeed it came up in numbers in respect of job losses are an exaggeration. Prime Minister’s Questions today—about the banks To be honest with you, Alistair, I think we just have who have been taking public money and not being as to wait and see what does come out at the other end helpful as they ought to individuals, businesses and of the tunnel. Clearly there is some duplication in the everything else. Is the position any diVerent in operations of two banks; nobody can expect them to Scotland in terms of degrees of magnitude? Are they exist in parallel after the amalgamation takes place. more helpful or less helpful or just as unhelpful in Professor Bell: I would like to say that I think it all Scotland as they are down south? depends on how the regulations are set once the Mr Clark: Speaking to colleagues in British system stabilises which may be a couple of years out. Chambers of Commerce the position seems to be Then there is the question of whether it is possible pretty similar, from the anecdotal evidence we have for new entrants to get in to increase competition. heard certainly. We have had a lot of evidence from Maybe, following the financial crisis, that would be across Scotland, as we were discussing earlier, of possible. rates being increased for both loans and overdraft facilities and that is something which colleagues Q48 Mr Carmichael: It will not be a Scottish bank south of the border have recognised as well. though, will it? Mr Smith: We have spent a lot of time analysing the Professor Bell: No, it will not be a Scottish bank. diVerences between north and south of the border. We are aware that there are serious diYculties in Q49 Mr Carmichael: It will be the Bank of China or access to finance for companies in Scotland and that the Bank of America or somebody else seeing the is something which needs to be addressed. gap in the market; these will be the boys that can compete with the Lloyds TSB/HBOS. Q52 Mr Davidson: There has been a lot made of the Mr Lonsdale: We saw HSBC come in with a way in which what is happening might result in these statement the other day about 20% increase in their Scottish institutions—the Royal Bank, the Bank of lending capability over the next 12 months. It depends whether you classify them as a UK bank. It Scotland and all the rest of it—but what I am not clear about is whether or not at the moment, in a does provide an opportunity for others. Y Mr Clark: As I said earlier, this problem is going to time of di culty, there are actually any benefits to be solved by a restoration of competition within the the Scottish economy and businesses from them banking sector. Clearly there will be one less being Scottish or being much more Scottish. If they significant player, as Iain has said, in the high street. are behaving exactly the same way across the UK as a whole there is an issue about whether or not the place of domicile actually makes any diVerence. Q50 Mr Carmichael: One massive player. Mr McMillan: I do not think it does, Ian. I think the Mr Clark: Yes, absolutely, but there is no shortage of other banks out there and we would certainly best way to describe the banks in Scotland is that hope to see a restoration of competition sooner although they are proud of their Scottish heritage rather than later. they are international organisations that happen, for Mr Boyd: Can I just make a general point about the historical reasons, to be headquartered there. When banking sector that we hope to see emerge out of all lending guidelines and criteria are being developed this at the end of the day? Certainly from our point in banks they are being passed through the of view we would hope it is one that is far more organisation as a whole, whether it is a branch in focussed than it has been in the recent past, Wick or the branch near Lands End. supporting the productive sector. Graham has Mr Smith: We do not think the banks in general have already mentioned that we believe firmly that there been any more helpful to Scottish companies as should be a Scottish investment bank to pick up that opposed to UK companies in providing the type of market. Professor Bell earlier in the discussion long term patient finance that companies need. The identified the factors that underpin most Scottish banking sector that we hope to emerge not just in productivity, no R&D and no innovation et cetera. I Scotland but across the whole of the UK is of the would argue that much of this can be retained to the model that Stephen articulated earlier on. Processed: 12-03-2010 18:42:30 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG1

Ev 12 Scottish Affairs Committee: Evidence

10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell

Q53 Mr Davidson: A more helpful sector? Mr Smith: There is absolutely not doubt that CEOs Mr Smith: A banking sector that is focussed on what of banks and FTSE 100 companies have been the banking sector should be focussed on rather than overpaying themselves for a long, long time. There some of the speculation that has been a feature of have been considerable increases, even this year, of banking over the past decade or so, which has the CEOs in the FTSE 100 companies and indeed created the type of banking crisis that we have to face those in the companies just below that. Average up to. salaries of around £3.5 million in anybody’s language is excessive and something certainly needs Q54 Mr Davidson: It follows on from the point that to be done to control that level of pay. There is no V the First Minister made that the banks have been doubt that those types of incentives that were o ered destroyed by spivs and speculators, but the spivs and to CEOs, particularly in the financial services sector, speculators were actually running the banks in these were part of the cause of the problems that we got circumstances. Can I ask whether or not you have a into in relation to unacceptable and irresponsible Y view on the suggestion that I know has been made in risk taking which has created the di culties that we the United States that those companies, like the are now all having to face up to and indeed are banks, that have taken huge amounts of government having to pay for. V money should not actually be paying salaries larger Mr Walker: I just want to say that I will o er Ian my than that of, in our case, the prime minister, and that support in his campaign if we can have a go as well Y that would be evidence of a change of attitude were at the people who buggered up the Post O ce who we to have such a self-denying ordinance. Iain, are earning over a million pounds a year out of the would you like to tell me the CBI’s view on that? public purse. They have got rid of Christmas Y Mr McMillan: Not really! chocolates in my sorting o ce as a cost cutting exercise; it is just shocking behaviour by these people. Q55 Mr Davidson: We come across people like you when we are canvassing and I am not clear whether or not you are a “don’t know” or a “won’t say”. Q59 Pete Wishart: I note the very positive work that Mr McMillan: I think the market place by and large was given by most employers’ organisations and I should determine salaries but I am not saying that it think there were a load of sensible, well thought out, should be free and unfettered. I think we may well constructive suggestions about the way that find that because of the large stakeholdings that the Scotland can be put forward. Even today the government has taken in a number of the British Scottish Parliament made an announcement on banks that some sort of guidance will be given to infrastructure projects and I am glad that the A9 is boards as to what the government expects in terms securing all these great upgrades and bringing of salaries. forward this measure and the move to have it all the way up to Inverness. That is fantastic. One of the Q56 Mr Davidson: If a rule went out from the things that the council of economic advisors government, a suggestion that no banker should be identified and one of the problems that the Scottish paid more than the prime minister, that is not Government has is the fact that we have no something you would throw up your hands in borrowing power. Even local authorities have the horror about. ability to borrow in order to try to bring forward Mr McMillan: I think if I were the chief executive of some of their capital spending. I do not know if the a bank I might. employers’ organisations have a view about that, but giving the Scottish Parliament the essential tools to help us deal constructively and properly with the Q57 Mr Davidson: But you are not. Particularly situation as it emerges in Scotland and I know there given that they have been bailed out, banks that is frustration amongst my colleagues that they do would have collapsed had it not been for the not have the levers and powers to help Scotland government riding to their rescue surely they should manage the worst of this recession. I do not know if not continue to pay themselves huge amounts of you have a view about that at all. money when many of them would have been getting Mr Smith: The STUC, as part of the work that we P45s had it not been for the tax payer. have been doing in relation to the powers of the Mr McMillan: For those who have been rescued, the Scottish Parliament going forward—a contribution men who were being paid larger sums of money have has been made both to the Calman Commission and gone or are going. Those who are running the banks the National Conversation—have proposed that the in their place going forward need to be good people Scottish Parliament should have borrowing powers. and pretty unusual people to run an enterprise of The point has been made that we have local that size. They have to be rewarded or else they will authorities that have potential borrowing powers; go somewhere else. I think it is pretty simplistic to other institutions have the ability to borrow and we say that the leader of a bank should earn the same believe that the Scottish Parliament should have a salary as the prime minister; I think it is more similar power. Treasury rules and overall UK complex than that, to be honest with you. Government position on borrowing is something which would have to be part of that consideration of Q58 Mr Davidson: Does the STUC have a view on how that power was to operate. The point I made that? about the council of economic advisors is it is Processed: 12-03-2010 18:42:30 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG1

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10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell supposedly the greatest intellectual capacity in might have to pay up to six pence and eight pence to economics which has ever been brought together in fill the gap in the hole between council tax raising Scotland and all it comes up with are the issues that and local income tax. I just want to have the view of we have been talking about for the past five years, every one of you; let us start with the Scottish that is hardly something to shout out about. Chambers of Commerce. Mr McMillan: Borrowing power is an interesting Mr Clark: Our members, certainly across the one. Graham is right when he mentions local country in terms of the Chambers of Commerce authorities. Local authorities of course impose the across the country, are unanimously against any council tax and I think by and large the borrowing proposal to tax Scotland in excess of the rest of the powers should go with some tax powers so that if a United Kingdom. That is exactly what would political entity does borrow more money to spend happen under a local income tax. today then it has the tax leverage to repay that Mr Lonsdale: There are concerns about cost to money in the future. I think that these things need to businesses in implementing this, the complexity go hand in hand. involved, as Garry said, sending out the wrong message to individuals outwith Scotland and also Q60 Pete Wishart: You mention the Calman report firms outwith Scotland who may want to invest and the results of that being most depressing in that north of the border. There are also issues to do with there is very little in the way of forward thinking, but the funding, how would the funding deficit be paid I would say that this is an opportunity for the for? Would it be taken out of budgets for Scottish Calman Commission where significant new powers Enterprise or for transport infrastructure? These are can be given to the Scottish Parliament to help us do questions we have not had answers to and our these things and I hope I am not going to be members are pretty firmly opposed to it I have to say. depressed at the end of the Calman Commission’s Mr McMillan: I cannot add anything to what David recommendations and that there will be some said; he speaks for the CBI as well. substantial powers. There is a disappointment with Mr Smith: Not many people think that any sort of what the economic advisors suggested and that tax is fair. Maybe we should shift the debate around could be a lot to do with the fact that there is very about tax and talk about responsibilities in relation little that can be done to change and macro-manage to tax. We are not in favour of a local income tax. We the Scottish economy because all the tools are down are not sure exactly how, for example, the SNP’s in Westminster. proposals can be considered local. They have, up Mr McMillan: Pete, I am not going to get into a until now, as far as we are aware, been collecting the discussion with you about these levers of power and tax centrally and allocating it locally rather than a the nationalist agenda and so on; I am not going genuine local income tax. That diVers from the there today. Liberal Democrats’ position. We believe there should be a balance in the taxation system; there Q61 Chairman: I think we can move on then to should be an element of property tax within our housing. How far do you think the Scottish housing taxation system and we favour that type of approach market will follow the pattern in England and and that is why we are opposed to local income tax. Wales? Mr Boyd: I have nothing to add. Mr Lonsdale: Our locus on this issue, I guess, would be from our members’ perspective, those who are Q64 Mr Carmichael: Is it the position of CBI involved particularly in house building. In terms of Scotland, Chambers of Commerce and apparently prices I guess Professor Bell would have been in a the STUC that council tax is fair? better position to answer that, but obviously we have Mr Clark: We do not have a view as such. seen very hefty increases in house prices north of the Mr McMillan: We take the same view as the STUC border but not to the same extent as south of the that there is a place for a property tax. Where I border. would agree with the SNP is on the decision to freeze the council tax. The reason I say that is because in Q62 Mr Walker: He did say that your housing the past 10 years the amount of council tax in market was holding up better than any other in the Scotland has risen at double the rate of the retail United Kingdom at the start of the evidence session, prices index and it has outstripped average earnings. did he not? I think he did. The Professor said that the That, in my view, is why the council tax has fallen Scottish housing market is proving to be much into disrepute; it is its rate of growth and not the more resilient. basis of the tax itself. It was not unacceptable when Mr McMillan: That does not mean to say that the it was brought out at first. Scottish housing market is in good shape, it is not. Q65 Mr Carmichael: So you want revaluation. Q63 Chairman: This local income tax which was the Mr McMillan: I did not say that. great idea from Liberals and Scottish Nationalists replacing council tax, it has been tried in Scotland as Q66 Pete Wishart: What surprises me is that the poll tax and do you not think it will be equally STUC and the Labour party were supporting the damaging for hard working families? They seem to council tax and I think it is unforgivable given the believe that they have to pass on the three pence in diYculties in my constituency. It is not fair and it can income tax, but all the studies show that people never be fair. I am really surprised that the STUC Processed: 12-03-2010 18:42:30 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG1

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10 December 2008 Mr Iain McMillan, Mr David Lonsdale, Mr Garry Clark, Mr Graham Smith, Mr Stephen Boyd and Professor David Bell think that there is an element of fairness within the in relation to dealing with the current recession but council tax. Surely the principle of the STUC is I think the Committee has an important role to play about the ability to pay progressive taxation. What in talking to us and dealing with us in terms of how is wrong with that? the economy should be shaped moving forward. Mr Boyd: If it is a tax on earned income how can that Chairman: If the STUC or the CBI think of any issue be progressive? we should be conducting an inquiry about then if Mr Smith: So people who earn their income entirely you put it in writing we will be happy to read it. from shareholdings will not have to pay any income tax. Q68 Mr Carmichael: I have just rejoined this Committee in the course of this year and we run the House of Commons Select Committee procedures Q67 Chairman: Can I now thank the witnesses for but in fact, unlike most select committees, we do not their attendance today. Before I declare the meeting have a department with substantive executive closed, do you wish to say anything in conclusion, functions to scrutinise and there may be an perhaps on areas which we have not covered during opportunity for us to think about how would do our our questions? business diVerently to keep that on-going Mr McMillan: I think, Chairman, we have had a engagement with people like yourselves. This has good debate. We will not always agree on everything been one of the most useful committee sessions I but, as I said in my opening remarks, I think the have had since I have been in Parliament. work of this Committee is hugely important to Mr Smith: It is a long time since the STUC has Scotland. It has certainly been a pleasure for David actually come to Westminster to give evidence to a and I to come here again and engage with us and committee, let alone to the Scottish AVairs Select thank you very much for inviting us to be here. Committee and we would certainly wish to have an Mr Smith: On behalf of the STUC thank you for on-going dialogue with the Committee. inviting us to participate in this discussion. It has been very interesting. It has gone in a direction that Q69 Mr Walker: Garry, do you want to say perhaps we did not envisage. I think it would be something? good to think that we could have an on-going Mr Clark: Just to add to the comments of my dialogue with the Committee, particularly about colleagues, it has been great to have the opportunity how we move forward and raise issues about how we to speak directly to this Committee and we would rebalance the economy moving forward. Obviously welcome more engagement in the future. there are a number of issues that we need to tackle Chairman: Thank you all very much. Processed: 12-03-2010 18:43:07 Page Layout: COENEW [SO] PPSysB Job: 439642 Unit: PAG2

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Wednesday 4 March 2009

Members present Mr Mohammad Sarwar, in the Chair

Ms Katy Clark Lindsay Roy Mr Ian Davidson Mr Charles Walker Mr Jim Devine Mr Ben Wallace Mr Jim McGovern Pete Wishart

Witnesses: Mr Stephen Boyd, Assistant Secretary, Scottish Trades Union Congress, Ms Wendy Dunsmore, UNITE National Secretary for Lloyds Banking Group and Mr Rob McGregor, UNITE National OYcer for the Finance Sector, gave evidence.

Q70 Chairman: Good afternoon. I should like to Scotland relies upon our two biggest banks for welcome you to our session. Can you please economic prosperity? How much will Scotland introduce yourselves for the record? suVer as a result of the collapse of the banking Mr Boyd: I am Stephen Boyd, I am an Assistant system in the UK and Scotland? Secretary with the Scottish TUC. My responsibility Mr McGregor: In terms of the employment position is economic and industrial policy. in Scotland, we estimate that about 100,000 people Ms Dunsmore: Wendy Dunsmore, National are employed in financial services in Scotland. I Secretary for the UNITE trade union responsible for would suggest around about 45,000 to 50,000 are Lloyds Banking Group. employed either at HBOS, Lloyds TSB or Royal Mr McGregor: I am Rob McGregor. I am the Bank of Scotland Group. I do not have accurate National OYcer for the UNITE trade union with figures but obviously they are a significant part of the responsibility for the finance sector. financial services sector in Scotland and they are by no means the only part of the financial services Q71 Chairman: Before we start detailed questions, sector. One of the strengths of financial services would you like to make any opening remarks? sector in Scotland is its diversity and that diversity of Mr Boyd: No thank you. operations, whether it be from insurance companies or other banks or indeed to a lesser extent the Q72 Chairman: May I ask you the first question building society sector, hopefully holds the sector in then? Why do you think that we are in this economic good stead. In terms of what the crisis has done, it diYculty and economic mess in Scotland and in the has certainly damaged the reputation of the financial United Kingdom? services sector and also the idea that financial Mr Boyd: This stems from a number of reasons. As services are financially mature and economically regards the financial sector, there has been a massive independent; it has clearly had an impact there. failure of regulatory oversight of the sector; too However, that impact is replicated elsewhere so it is many companies have been able to engage in not just felt in Scotland; I would say it is felt across activities which frankly they did not understand and the rest of the UK and indeed much further afield, which have left them massively exposed to the certainly the United States being a case in point. problems in global markets. There has been an undue reliance over a period of many years on the Q75 Chairman: Mr Simpson from UNITE has financial sector to drive growth at the expense of the expressed concerns that unions have not been manufacturing sector. consulted suYciently. What is your view on this? Mr McGregor: To echo those comments, I think the Mr McGregor: Mr Simpson has expressed concerns regulatory and supervisory framework for financial that trade unions have generally about the quality services in the UK and generally across the world and level of consultation which exists between has been demonstrated to be simply not fit for employers and representative bodies. It is certainly purpose and I would argue that it is largely the the case that it is a cause of ongoing frustration for failure of adequate monitoring and policing of the trade union, particularly in relation to the two financial services and indeed enforcement of institutions we have referred to, Royal Bank of regulations that has resulted in many of the Scotland Group and the Lloyds Banking Group problems we are experiencing today. which now controls HBOS, over the quality and detail of the information that the employers have Q73 Chairman: Wendy, do you want to say supplied in terms of their plans and how they anything? propose to progress with the restructuring of the Ms Dunsmore: No, that is well covered. business. We fully accept that it is very, very early days but, if I give a specific example, in the case of the Q74 Chairman: Since we all know that Glasgow and Lloyds Banking Group they have identified several Edinburgh are the second largest financial centres in hundred specific areas where they will reduce costs the United Kingdom and among the ten top and they will deliver cost savings in the region of £1.5 financial centres in banking, pensions, insurance and billion, yet they are not prepared to share any detail investment in Europe, how much do you think that with us as yet of where specifically those cost savings Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor might be secured, whether that is in terms of Ms Dunsmore: To come in from the Lloyds Banking reducing the overall size of the branch network, the Group position, there are going to be changes in integration and migration of IT branch platforms or Scotland, as you know. The bank has come out and the closure of call centres and that creates a degree of said the retail brand is going to be Bank of Scotland, uncertainty amongst people who work for the which does away completely with the Lloyds TSB organisation. They know something is coming brand in Scotland in the retail department. There because their employer has told them that significant will be an amalgamation of branches. The company savings need to be realised but there is not further are quite confident—and we are pushing for details detail. on that—that they are going to reduce the staYng in the best way because it is a three-year plan, with natural attrition and retirement and, if necessary, a Q76 Chairman: A huge number of people in voluntary severance package. That is the way they Scotland are employed in the financial sector. How would like to go down the road. Currently the many job losses do you think there will be because of branch network in both banks is under the numbers, the merger, because of Lloyds TSB and HBOS and so they are confident that there will be no need to call the saving exercise by the Royal Bank of Scotland? for compulsory redundancy. Within the HBOS and Mr McGregor: I would like to be more specific but I Lloyds Banking Group there have been job losses am afraid we cannot be. We have only had very over the last nine months and although there were limited information from both employers as to the over 4,000 job losses there were fewer than 30 extent of any job losses. In terms of Royal Bank of compulsory redundancies and that was because of Scotland, we do know that there will be 2,300 job the pressure the unions have put on the company to losses across the United Kingdom, of which a work with us to ensure there will be no compulsory number will be in Scotland. We also know from the redundancies or to minimise them as quickly as strategic review which has just been announced by Stephen Hester, and he was pressed on this in the possible. They have had to be creative on that. media, that there would be job losses in the region of 20,000. Again we cannot say with any degree of Q78 Chairman: When I met the representatives of certainty just how many of those will actually aVect HBOS before the merger I was told that the workers in Scotland or frankly any other part of the headquarters of HBOS would remain in Scotland United Kingdom. We have done various pieces of and they would keep the brand name Bank of analysis and obviously taken soundings from Scotland on the high street. Are they fulfilling this companies across the UK about how they believe the commitment? economic crisis is going to impact in terms of employment levels and our fear would be that we Ms Dunsmore: The headquarters will be in Scotland; could see a contraction in employment in the sector there is no doubt the headquarters are going to be in of anywhere between 10 and 30%. If we have one The Mound. You can look at that as cynically as you million workers in finance, that is an awful lot of want, but the company announced in a statement in people, but without any firm details it is only November that the Bank of Scotland brand is going speculation. What we are very keen to avoid is the to be the brand for Scotland. It will be Halifax and charge of being alarmist. Lloyds TSB in England in the retail branch network but the Bank of Scotland brand will remain in Scotland. Q77 Chairman: Do you know whether employees are likely to be given a choice between relocation and redundancy? Q79 Chairman: What about the headquarters of Mr McGregor: In some cases yes. We do have, Royal Bank of Scotland? Are they going to remain certainly historically,a reasonable track record in the in Scotland? finance sector of trying to mitigate the consequences Mr McGregor: Royal Bank of Scotland’s of redundancy through retraining, relocation and headquarters will remain at Gogarburn near also asking for volunteers for redundancy. The last Edinburgh. time there was a major restructuring at the Royal Bank of Scotland, when they acquired NatWest, 18,000 jobs were shared and the number of enforced Q80 Mr Devine: How many staV are employed in redundancies, compulsory redundancies was very Halifax Bank of Scotland and how many in RSB small comparatively speaking. We are in a diVerent and Lloyds. position now. The prospect of getting huge numbers Mr McGregor: In total? of volunteers to apply for redundancy when their employment prospects outside of that company are very, very remote is going to be somewhat Q81 Mr Devine: In the three of them. problematic. As we have indicated to all the Mr McGregor: Royal Bank of Scotland employs employers with whom we have collective around 220,000 people worldwide of which there are agreements, we have a track record of working with about 120,000 in the UK. The Lloyds Banking them to try to deal with these compulsory Group has about 140,000, that is the combined redundancies or redundancies as they stand and we group of Lloyds and HBOS. are happy to work with them again in the future. Ms Dunsmore: HBOS before that had 74,000. Processed: 12-03-2010 18:43:07 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor

Q82 Mr Devine: So that is 260,000. I am assuming time I had any dealing with it. We do not want to there is a freeze on recruitment at the moment, is take too many £16 millions out of it at any one time there? but it was in a particularly good state. I know that a Ms Dunsmore: Yes. few years ago the Royal Bank of Scotland put a significant amount of additional money into the scheme which certainly bolstered the position. Q83 Mr Devine: And will turnover be 10%? Ms Dunsmore: I am not sure about the Lloyds TSB Ms Dunsmore: It depends on the department. In one but because Lloyds Banking Group is some areas there can be as much as 50%, call centre overseeing Lloyds TSB we are less concerned about environments, et cetera, and quite a high percentage V that. With the HBOS one, the trustees have been of sta work in call centres. In other areas the meeting with the Lloyds Banking Group to get the turnover is about 4%. It is between four and 50% but V guarantees that HBOS had already given and, like it depends on the di erent business areas. Royal Bank, HBOS did put a substantial amount of money into the pension scheme to make sure it was Q84 Mr Devine: What is the age profile of the going to be a healthy pension scheme. The pension workforce? trustees have been looking for those commitments Mr McGregor: As a sweeping generalisation, the age for some time since then. profile is coming down, probably to late thirties early forties. The split between men and women is around The Committee suspended from 2.27pm to 2.42pm 60% female 40% male across the industry as a whole. for a division in the House. You are looking at a majority of staV who will have six years or under of service with the organisation they work for. Q88 Mr Davidson: May I just ask about the introductory remarks you made because both Mr Boyd and Mr McGregor mentioned the main cause Q85 Mr Devine: I used to be a fulltime union oYcial of the crisis as being regulatory failure. Surely the and basically I am asking whether this crisis can be banks and their activities had something to do with managed by an early redundancy package and a this. Are the banks not the authors of their own freeze on recruitment. misfortune and the regulators are perhaps at fault in Mr McGregor: Yes, it could but it all depends on the not stopping them? Surely the main cause of this extent of the employers’ plans. If the employer— crisis is the action of the banks. again specifically looking at HBOS—looks to Mr McGregor: Yes, it is. It is certainly the case that achieve £1.5 billion of savings and almost exclusively the regulatory framework which existed provided all in staV costs then we would struggle. In both the cover frankly for banking behaviour and companies there is—unfortunately it is well used— banking activity which basically sought to take risk a job security agreement and redundancy agreement as a central part of any banking activity out of the which actually sets out how we manage the process equation. It was the culture that existed and was of handling restructures. It is not beyond the wit of developed probably over the last 10 to 15 years in the organisations to achieve it through voluntary certain parts of the banking sector or the finance means. sector that encouraged this very much short term, your next quarter’s results, your next annual results, measuring them, that kind of culture rather than Q86 Mr Walker: But turnover obviously will long-term strategic planning and finance that led in decline, given the state of the job market. People part to the crisis which engulfed the industry. tend to leave jobs to go to jobs, which has been the Mr Boyd: I should like to second those remarks. I case for the last decade or so. I imagine, as you said think regulatory failure did allow the consequences earlier, because the job market is so tight there is less of reckless lending in specific markets, that is the US inclination to move because you are not moving to sub-prime market, to be globalised. However, there another position. is no doubt that the executives within these banks Mr McGregor: That is very true. A lot of the data we were strongly incentivised to pursue short-term have is historical and certainly it would have been in profit, they were incentivised to pass oV risk as value the period up until the time of the financial and creation and essentially the whole bonus structure economic crisis when turnover rates in certain parts encouraged this reckless behaviour. of banks and the finance sector were quite high Mr McGregor: On the point about regulation and compared with other parts of industry. What we are V why it is key,it is now two years ago that the first sub- likely to see is a significant tapering o of that rate. prime mortgage specialist in the United States filed for bankruptcy. I would argue that, if the regulatory Q87 Mr Walker: Slightly oV the point Chairman; framework had been more robust the warning signs you might rule me out of order. What do the pension of that decision of that company to go into funds look like? We have not heard much about the bankruptcy had been addressed and investigated banks’ pension funds. Are you confident that the more thoroughly, we may not have seen some of the pension funds can meet their obligations and future calamitous events we have seen over recent months. obligations? Mr McGregor: I cannot comment specifically on the Q89 Mr Davidson: May I just follow up that point HBOS one; I can only talk about the RBS pension about regulation? UNITE has suggested that in any scheme from experience and it was healthy the last future system of regulation there ought to be trade Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor union representation, presumably from yourselves. contributed to the financial crisis we are dealing with Can you just clarify for me why exactly you think is not the retail banking sector. UK retail banking that would add value? has its problems but on the whole it remains Mr McGregor: One of our concerns is the productive and profitable. The areas with the interchangeability between regulators, the City, the greatest problems or the greatest systemic risks to Treasury and indeed parts of the Government. It is a the financial sector emanated from within very clubbable atmosphere. We are concerned about investment banking and for years frankly the level of independence, the level of objectivity, investment banking has been a no-go area for trade people from outside the sector having some role or union organisations. engagement, first of all how the new regulatory and supervisory architecture is developed but also how it is then implemented and actually policed. Whilst Q93 Pete Wishart: What about the rest of the unions obviously UNITE would argue, because we are the in Scotland. Did you see nothing which alarmed general union for finance in the UK, that we should you, which you felt should have been brought to our play a part in that. That is not to say it necessarily attention? I never heard anything from the STUC has to come from us but we do want that level of about some of the diYculties prior to this financial independence, that level of objectivity to be part of crisis kicking in. Was there nothing? the regulatory framework going forward. Mr Boyd: Right or wrong I could not sit here honestly today and say that we predicted the extent Q90 Pete Wishart: Since the credit crunch and the of the crisis and the pace of events over the last year following financial crisis a lot of people turned round because we simply did not. What we have been and said we saw this coming, we saw what was highlighting for a number of years is that we would coming along; everybody is wise after the event argue that Government at all levels—I have to say all about all the things which have gone wrong with the levels and opposition parties bought into this as regulatory system and whether it was some of the well—had misplaced faith in the financial sector to activities of some of the major banks. Did the unions drive growth sustainably into the future. We have any sense that this was coming? You are consistently raised concerns about that. We working with the banks all the time and you see what consistently raised concerns about manufacturing is there. Were you one of the groups saying you saw and policy framework not being fit for purpose to this coming and were you warning people about allow Scottish manufacturing to develop sustainably what was going to be hitting? into the future. Generally, in terms of the economic Mr McGregor: I do not think we could sit here and and social model which has been pursued for the last honestly argue that we had the kind of sense of what decade, we have a long track record for raising this was going to happen to financial services that type of concern. Like Rob, I could not honestly sit actually materialised. The areas of concern we had here and say that we predicted what has happened were particularly in employment practices and how over the last year because, in common with most that developed that culture, not necessarily of other people, we did not. misselling particularly but the sales culture which existed in the banks, the idea that there is the ability Q94 Mr McGovern: May I first of all record my to record year on year record profitability and that concern that the SNP member of this Committee not result in some kind of crunch. seems to imply that somehow or other the trade unions were short-sighted in not seeing what broadly Q91 Pete Wishart: You had no idea that this most other people in the country did not see either, financial crisis was coming along. indeed throughout the world globally? You Mr McGregor: I do not think we could claim we mentioned the pension scheme and I think you said knew the extent of the crisis but we did argue with that the pension scheme could not withstand many the company and also with the regulator about the more packages of £16 million. Just for my employment practices which existed in the industry information, is the package that Sir Fred Goodwin and the potential long-term damage they could do. is—or possibly not—mooted to receive from the To be perfectly honest, if we had sat down with same pension scheme as your rank and file bank anybody 18 months ago and said the UK taxpayer is workers? going to be committed to somewhere in the region of Mr McGregor: It is our understanding that it is. We £600 billion . . . I have to say that I did not hear that are actually seeking clarification on the impact for from anyone. the RBS group pension fund. What we understand—and it is largely from press reports, we Q92 Pete Wishart: Was nothing going on? You work have had no formal clarification from the company in the banks all the time. Your membership is in the itself—is that the company,Royal Bank of Scotland, front line with all this. In the activities of RBS and have put additional money into the pension scheme HBOS particularly were alarm bells not ringing to to meet what will be the pension scheme’s high heaven with some of the things which were obligations to Sir Fred Goodwin going forward. going on? Surely you must have known. Mr McGregor: We were concerned about the sales culture and the regimes which operated in the retail Q95 Mr McGovern: Say, for example, a local banking side but if we are being honest the areas of government pension scheme is based on a fund greatest concern, the area of banking which has calculator of eightieths. Is Sir Fred Goodwin’s Processed: 12-03-2010 18:43:07 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor pension based on any sort of formula or is it just a bonuses out of that. Would that be a culture you golden handshake? were familiar with? If the company had gone Mr McGregor: I genuinely do not know. It is bankrupt in February the Halifax would not have certainly not the standard calculation for most got their money but the calculation was that people members of the final salary pension scheme, which is would still pay in and they would get the money and a sixtieth scheme up to a maximum of 40 sixtieths. the bonus would be paid. Ms Dunsmore: The culture of any bonus scheme is Q96 Mr Walker: About eight or nine years ago, about getting as much money for the company as when Mr Greenspan, who was the US financial possible. I cannot personally say whether or not that chief, warned about irrational exuberance, there was would have been the case, but if the person who was a momentary pause and everybody just continued as doing that deal was successful they would have been before. I think many of us knew that the bubble was rewarded for that year. This is people who are going to burst at some time but nobody wants to call making a hell of a lot of money and it is not really in the top. When the Prime Minister—this is not a our negotiating band. The people in our negotiating personal dig at him—in 2008 talked about a new band are not exposed to that kind of lottery numbers financial paradigm that probably was the top. When bonus packages. That could be the situation but I do people start talking about new financial paradigms, not know. Yes, if the company has made money out it is about time to get out. Tell me about investment of it they will get a bonus for it. banking. It does seem that it is the investment banking arm which is largely responsible for the Q98 Mr Walker: May I just return to pensions? mess we find ourselves in. What do you make of calls What is the pension structure for the major banks in to separate retail banking from investment banking Scotland? Is it final salary at the moment? in the future? Mr McGregor: It is a mix. It is a mix of defined Mr McGregor: We are not entirely sure in practice benefit and defined contribution schemes. what that will actually deliver in terms of greater Specifically on Royal Bank of Scotland, they closed stability to the finance sector as a whole. The their final salary scheme to new entrants in October argument which has been run is that the blurring of 2006 but obviously staV who were employed prior to the lines between commercial and retail banking and that date remain in the final salary scheme. The new investment banking is part of the problem which entrants since that date and also those employees caused the financial crisis or, rather, why these who are involved in their insurance division, Direct companies got into diYculties. Even with Line and Churchill, are all in money purchase decoupling, if we do not have the kind of regularity retirement savings plans. oversight of investment banking that we need, we are in danger of simply repeating some of the mistakes Q99 Mr Walker: Are there any new employees which we have all experienced. If the argument is put starting in banks—if there are new employees forward that that is the way forward then obviously starting in banks at the moment—who are starting that needs to be considered but I genuinely believe in final salary schemes? So all the final salary that it is the regulation and supervision of the sector schemes have been closed. as a whole which will ultimately prevent a Ms Dunsmore: To my knowledge, yes. reoccurrence of the events which we are all Mr McGregor: Yes, I think that is the case. Royal experiencing. Bank of Scotland was one of the last major banks to close its scheme. Q97 Mr Devine: May I take you back a bit to what you were saying earlier on about the cultures, the Q100 Mr Walker: As far as employer contributions way the banks were working? In particular HBOS. I are concerned, how much is the employer putting in was involved in the Farepak campaign and I on average to their employees’ pension schemes? understand that in February of the year when the Mr McGregor: In the defined benefits scheme, company collapsed in October they had a meeting certainly from the last time we knew about Royal with Halifax Bank of Scotland and they basically Bank of Scotland, it was round about 21%. told Halifax that they were not going to make it through the year, they were not going to deliver. Q101 Mr Walker: They were putting in 21%. Halifax, who had given the company a £24 million Mr McGregor: Twenty-one per cent in the defined overdraft, actually extended the overdraft to keep contributions schemes; in the money purchase the company going. In August Farepak went back to schemes it was between 11% and 14%. Halifax and asked whether they could ring-fence the money so that the people who paid in could get this Q102 Mr Walker: Could you see that level of money. That was denied; Halifax did not allow that contribution coming under some pressure in future to happen. The company collapsed on the last day and how would you respond to that if it did? that people were due to pay money,so the bulk of the Mr McGregor: It is already coming under some money was in. Basically Halifax Bank of Scotland pressure and it was why many of the institutions got their £28 million back and the company basically closed their schemes down. The problem now is that stuVed four other companies. What was interesting, in many of the institutions, and we were talking I have been told, though obviously I can only allege earlier about the turnover in staV, it will only be a this, was that senior managers who were responsible few years, the current crisis notwithstanding, before for getting that money back made substantial the majority of employees actually are not in the Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor defined benefit scheme. So it may be at times when Mr McGregor: No. only a minority of employees are currently members of the defined scheme that that is when the pressure will really kick in. Yes, there is constant concern Q107 Mr Davidson: I find that surprising. about how pensions are going to be funded and Mr McGregor: The proposal from Burt and supported going forward. Mathewson was, we were advised, again through the reports in the media, that Stevenson, who was the chairman and Hornby would be removed, would be Q103 Mr Walker: What they are doing now is saying sacked and they would replace them. That was our they are putting in between 11% and 14% but understanding of their strategy. Given where we actually they are going to draw a line in the sand were in the financial crisis, given the fact that we had again in three years’ time. They are going to cut that a viable option, which was the acquisition of HBOS to 8%. Is that a concern? by Lloyds TSB and we were under few illusions Mr McGregor: Yes, it is. It has been under regular about the impact of that, but given the parlous state review and usually what will happen is that when of HBOS, we did not believe that the proposal from there is the triennial valuation of the pension Messrs Burt and Mathewson was a realistic or schemes that is usually the time at which employers tenable one. Had they sought to engage with us they will determine whether their ongoing exposure to may have been able to change our minds but that costs has to be addressed. I am not aware of when the simply did not happen. triennial review is of some of the major schemes but from past experience that is when we as the union representatives have debates with employers about Q108 Mr Davidson: That would have been similar to their pension costs and their pension contributions a Davidson/Devine proposal where I suggest I going forward. become chief executive and he becomes chairman and that would solve the problems. Is that basically Q104 Mr Davidson: May I go back to the previous what the proposal was? point you made about unions being involved in Mr McGregor: As we understood it. If that is not a regulation? That is an interesting point for us to fair reflection of the proposal then I can only say that consider picking up and if you have any more was because we were provided with no details. material on that we would welcome having that so Mr Davidson: This is the man who is advising the we could consider that when it comes to First Minister. That is worrying, is it not? recommendations. May I ask about tax havens and the impact of tax havens upon the business of both of the banks we have been discussing and the extent Q109 Chairman: When I had a private briefing from to which RBS and HBOS and Lloyds being involved HBOS it was obvious to me that the bank board of in tax havens has served to undermine jobs and the HBOS felt very strongly that it was almost operations of the banks in the UK in general and in impossible for them to survive even with the Scotland in particular? government injection to HBOS. So do you not think Ms Dunsmore: I have no knowledge. I could get that it is irresponsible of the politicians to meddle in information but I do not have it here. something they do not know which can bring devastating eVects for Scotland and the banking and financial sectors. Q105 Mr Davidson: That would be helpful to us. I Mr McGregor: I would disagree. I think politicians was thinking particularly of Sir George Mathewson V should meddle in that. The idea that in the midst of a who is very much involved in o shore banking and financial crisis we leave it up to those who are in part tax havens and the like. At the same time as he was responsible for it to muddle through would be an advising the First Minister of Scotland on abrogation of responsibility.The perilous position of supporting Scottish financial industries he was also HBOS has actually been borne out very recently. We involved in undermining it. Talking of Sir George have seen the results from HBOS and the record Mathewson, maybe you could just clarify losses that they have just recorded, primarily in their something. He was one of the people who were corporate and commercial division which is based in prominent in arguing against the HBOS/Lloyds Scotland. There was a very real prospect in our view merger. Can you clarify for me whether or not you that Halifax Bank of Scotland would go the same had a view on that merger and whether you think at way as Lehman Brothers and collapse and if we look the time there was no alternative or was the back at what the consequences of the Lehman Mathewson proposal a solid, well-worked-out Brothers’ collapse was on global market confidence, proposal which would have provided a viable not just in the financial sector but elsewhere, that alternative for HBOS? would have proved disastrous. We had few illusions Mr McGregor: In terms of the Burt/Mathewson about the acquisition by Lloyds TSB, but there was proposal, as we understood it, because there was no no realistic or suitable alternative strategy being direct contact by them with the trade union and put forward. labour movement—

Q106 Mr Davidson: Sorry? The adviser to the First Q110 Chairman: You will appreciate that at that Minister, in drawing up these alternative proposals, time it was a populist slogan that we wanted to keep did not consult any of the employees or their HBOS and did not want a takeover by Lloyds TSB. representatives. What I am trying to say is that at the cost of jobs, Processed: 12-03-2010 18:43:07 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor why should any politician of the Scottish Mr McGregor: There are in the banking sector. In Government Minister put the viability of the bank Lloyds Banking Group there are two other unions: at risk? there is the Accord union, which was the old Halifax Ms Dunsmore: If you are going to look at the brand staV association and there is the LTU, the Lloyds Bank of Scotland, if you really look at it the Bank of Group union. Scotland brand was lost in 2001 when Halifax and Bank of Scotland merged. There was then a real Q113 Mr Devine: Do you have a formal structure? desire to keep the Bank of Scotland brand, which Do you meet the management on a national basis was not really there because Halifax had actually every three months? taken over the whole retail arm, what we see in the Mr McGregor: It is more regular than that at the high street. Okay there was the Bank of Scotland but moment. There are formal structures, there are Halifax with it. If you are looking at brand and it is formal negotiating mechanisms and there is only in a romantic fashion, well Lloyds TSB are recognition of procedures, all the traditional doing that now. Lloyds TSB are going to be taken oV channels for dealing with communication and the high street and we are back to Bank of Scotland consultation. In order for those to work there has to without the Halifax brand. If we were going to be be agreement between the parties that they will arguing about a brand, we are a takeover or merger actually participate and that is the area of concern too late. we have. One part of the framework is prepared to work with it, the other currently seems somewhat Q111 Mr Devine: You issued a press release on 23 reluctant to do so. February where you seem to be suggesting that discussions and consultation with Lloyds is not as Q114 Mr Walker: Do you still retain confidence in good as you would like to see. We are going to be the senior management team of Lloyds Bank, given meeting with them a week on Thursday. Can you what has gone before us in the last three or four give us some detail about the diYculties you have? months? Mr McGregor: We are running to catch up in terms Ms Dunsmore: Coming from the HBOS point of of the plans that Lloyds have for the merger between view, to all intents and purposes the HBOS the two organisations. What we are concerned about management team has gone and the Lloyds Banking is that a lot of detailed planning and preparation has Group has got to be better. gone on. When the prospectus was issued it was 200 pages of a great deal of detail, very specific originally Q115 Mr Walker: Do you have confidence in Eric that they were looking for £1 billion savings, which Daniels and is it Victor Blank? was increased to £1.5 billion, that they had identified Ms Dunsmore: Yes. Put it the other way: my several hundred—I cannot remember exactly—cost confidence is not lost in them yet. That is as positive saving initiatives, yet when it comes to asking for as I can be. Now we are looking after 142,000 staV specific details about what this means in practice, and we are pushing at a door here to make sure the whether it means a significant closure of bank staV are being heard. The Government have saved branches, closure of call centres, whether there are the banks and we are trying to save the bank workers plans to outsource work significantly elsewhere, we and that is the big diVerence. are met with nothing frankly in terms of any information and we do know that those internal Y Q116 Mr Walker: What worries me about the detailed discussions are going on. The di culty we banking sector is that it seems to be populated by have with that type of approach, when you are enormous egos. There is still this “master of the dealing with consultations as a worker universe” mentality and I am just not convinced that representative, is that we are best placed to influence ego and ambition did not dictate Lloyds’ the outcome if there is early engagement on the plans intervention in HBOS and I am not sure that the to hand. Sometimes, in some companies, certainly senior management team of Lloyds had properly the more progressive companies, we will be spoken thought through the ramifications of what they to and consulted about plans which actually may not were doing. happen, but they are in the very formative stages. We Mr McGregor: It is fair to say that these were recognise that those discussions are commercially incredibly unique circumstances. There was sensitive, that they should be handled under absolutely no way under any normal economic embargo, they are not in the public domain, but they provisions that Lloyds would have been allowed to allow the trade union to form a clear position about acquire HBOS. Certainly, if they had been told 12 or the direction the organisation is going. If we are 18 months ago, when the Halifax share price was at simply presented with a fait accompli “These are our whatever it was, £12 a share, that they would be plans; 20, 30, 40 branches are closing in this region” allowed to buy the bank at £12 a share, they would then our default position is always to resist. If we had have bitten their hand oV. It is still early days in early engagement, then we might be able to influence terms of what would be the long-term eVect of the the overall outcome and reach a negotiated acquisition, not just in terms of jobs, but also in settlement to any proposals and that is the terms of the dynamic which exists within the UK frustration. financial services sector. You have a very, very large organisation with huge amounts of mortgages, huge Q112 Mr Devine: Are any other unions involved in amounts of current accounts and we do have a the banking sector? concern about how to ensure diversity within Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor

financial services in this country and that we are not recession and it is absolutely vital that they do not all beholden to a group of very big banks and very repeat the mistakes of the 1980s and 1990s, which of big insurance companies. I think the potential course have left us with massive long-term persistent outcomes or potential consequences of the economic inactivity which is still costing us. People acquisition are still to be identified. forget, when they are trying to cost the stimulus packages put together by Government, about the Q117 Mr Davidson: Notwithstanding that, just long-term costs associated with doing nothing. going back to your previous answer, am I not right in thinking that had the Government not supported Q121 Mr Walker: What happens if it does not work? Lloyds in merging, then HBOS would have been like That is the issue. What happens if once the £500 Lehman Brothers; I think that was the way you put billion, or whatever it is, is shot? What happens if it it. We all know what happened to Lehman Brothers. does not work? Then the burden will fall on the Mr McGregor: Again, it depends which position you public sector because I can see massive contraction come from. I think there is absolutely no doubt now, in the public sector potentially as tax receipts dry given the parlous state that HBOS was in, its reliance out. Have you given some thought as to what will on the wholesale markets for its funding, that it happen? would have collapsed or it would certainly have gone Mr Boyd: The point I am trying to make is that some the way of Northern Rock and it would have sought of the costs associated with doing nothing will also emergency funding from the Bank of England on an fall on the public sector. If you look at the public unprecedented scale. We were under no illusion that sector organisations in and around Glasgow and the it was in serious, serious trouble. massive resources they still have to employ in dealing with the persistent long-term economic inactivity it Q118 Mr Walker: I suppose what I was asking was is quite startling, certainly from our perspective. I whether you think the current construct is better attended a lecture last week by Danny Blanchflower than if it had just been nationalised directly and in Sterling and if there is one economist who comes taken into national ownership as an independent out of the whole crisis looking good it will be Danny entity. Blanchflower who essentially predicted where we are Mr McGregor: I genuinely do not think I am in terms of the quite rapid fall in employment. He qualified to answer on that one. I am not too sure of was arguing very strongly for another substantial the potential outcome. fiscal stimulus to be included as part of the Budget Ms Dunsmore: I am not qualified either but if you package this year and talking about a figure of look at Northern Rock from the point of view of our around £90 million, arguing that this fiscal membership and the staV who lost their jobs because stimulation very clearly targeted those people who of Northern Rock. If you are looking at the size of would spend the proceeds, that is the low-paid and HBOS, which is 78,000, it is not rocket science to see the unemployed. We have to ensure that any future what was going to happen there. packages are going to be targeted in such a way that the money is spent. Also, in targeting in that way, it Q119 Mr Devine: May I ask about the new Financial helps to make the country a fairer place. Sector Jobs Taskforce? How do you think it is going to work? What benefits is it going to add? Q122 Mr Walker: I would agree with you to some Mr McGregor: We welcome the focus on jobs in the extent. I think the VAT cap, although the motives financial services sector. It is a recognition that the behind it were good, given all the discounting that current arrangement where we have the Financial was going on that money could have been better Services Advisory Board, FiSAB, is probably a little spent potentially with greater targeting. too broad in terms of its direction and what it can Mr Boyd: We were arguing very strongly for a fiscal actually achieve. Any vehicle that promotes stimulus to be included as part of the Pre-Budget employment in financial services in Scotland, or Report. We would have preferred to have seen the frankly anywhere else, is to be broadly welcomed. major component of that package being targeted as support for the low-paid and unemployed rather Q120 Mr Devine: I take it as read that the unions are than a VAT cut. We also recognised that the choice fully supportive of the Government’s strategy here. in Westminster that day certainly seemed to us to be They are not just going to let the recession run as between a flawed stimulus package and no stimulus some people have suggested. What we are trying to package at all. Presented with that choice we would avoid, dare I say, is when we had mass opt for the flawed stimulus package every time. unemployment in Scotland in the early 1980s when high unemployment was a price worth paying. That Q123 Mr Davidson: May I turn to the question of is the central focus of what we are trying to avoid. pensions and bonuses? Without wishing to intrude Mr Boyd: Absolutely.From the STUC’s perspective, on the area covered by the Treasury Select at the moment that is priority number one: to ensure Committee but wanting to look in particular at the that at the UK level we see suYcient stimulus entered question of bonuses for the low-paid workers, many into the economy by the Government and at Scottish of whom are in my constituency and I am sure in the level to ensure that the Scottish Government’s constituencies of many of my colleagues, I do not economic strategy—and the new institutional quite understand why it is that so many of the staV infrastructure is about economic development—are working for banks, who are not particularly highly both fit for purpose in meeting the challenges of the paid, seem to have so much of their net income Processed: 12-03-2010 18:43:07 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor dependent upon bonuses. I am not clear why this is number of points. In some institutions you would not incorporated into the basic salary. Maybe you get ten times as many points for selling a loan as you could just clarify for me why we have the structure would for getting a customer to open a savings that we have and what is the position facing these account. In addition to that incentive you would also staV? be told which particular products you were required Mr McGregor: I have to say it is the ideology which to push either that quarter or that month and has governed the financial services industry for the achieving 100% of your target was in some instances, last 10 or 15 years. Royal Bank of Scotland Group in Halifax Bank of Scotland and Royal Bank of has not paid an across-the-board pay rise to all its Scotland, not enough; there would be an expectation employees for at least ten years. That is not to say you would exceed your target. that it does not make pay rises, because it does, but they are performance-related. Many longer serving Q126 Mr Davidson: May I ask whether or not you employees who may be regarded as simply can give us something about that to confirm that, so competent in their job receive no increase in base that by the time we see the banks in two weeks’ time salary.The only way they can augment their pay,and we have some stuV from yourselves about it and also they have no choice in the matter, is to participate in maybe, Chairman, our staV could approach the the bonus scheme. They are required, as part of their banks just to clarify whether that in fact is something contract of employment, to sell. If they do not sell, they will confess to or whether or not they will refuse first of all they do not receive any bonus payments, to admit that? but they can be disciplined under the performance Mr McGregor: Yes. management scheme which exists in Royal Bank of Ms Dunsmore: Yes. Scotland Group and ultimately can be dismissed. Chairman: If you could please drop a note to the That position is replicated across the industry. Clerk of the Committee that would be very helpful. Mr Boyd: I think one thing which emerges from the current crisis is that the intellectual foundations for Q127 Mr McGovern: I was going to put the question performance-related pay and bonuses may be originally to both the representatives of UNITE and interrogated somewhat because it is very deeply to Stephen for STUC, but I get the impression that ingrained. If you actually look at the evidential base, Stephen has probably answered with regard to there is very little evidence, if any at all, that performance-related pay. I take it the STUC line demonstrates that performance-related pay or would be against the concept per se of performance- bonuses actually improve economic performance. related pay. I used to work for a trade union myself On the contrary, there is a lot of evidence which and personally I am against it and I think the seems to suggest that it can be detrimental, organisation I worked with, GMB, are also against particularly when it is related at executive level to the it. If UNITE represent the workforce in the banking quality of decisions which can only be made and financial industry, have these performance- apparent in the longer term. related pay agreements been negotiated with the union or have they just been steamrollered through? Q124 Mr Davidson: I have very often had Mr McGregor: No, in some instances they may have complaints from staV working for banks that they been subject to agreement in their early days. If we were being forced not to serve customers but to had our time over again, certainly in the banking regard them as victims that they leapt upon and tried sector, we would have taken a much stronger line. to sell something to. Is that a common view amongst When they first came in there was a lot of guarantees bank staV? to underpin salary increases, in other words Mr McGregor: Yes, it is. It is a requirement of the notwithstanding that you may have a range of role. Frontline staV in the retail bank branch performance-related increases, at least everyone networks, and it does not matter whether you are a would receive a cost of living rise equivalent to the bank teller, a cashier or a customer adviser or rate of inflation. Over time, what happened was that personal banker, are all targeted to sell and that is to that security and that underpinning were stripped all customers, existing and new. If you fail to sell or away. Again, in Royal Bank of Scotland and indeed you fail to generate leads or secure appointments to a certain extent in some of the other institutions, then you fail your performance appraisal and you would have many thousands of individuals ultimately disciplinary sanctions can and indeed do either getting no base pay rise at all or getting an follow. increase which was demonstrably below the rate of inflation. Q125 Mr Davidson: One of the economic diYculties we have at the moment is individuals who are Q128 Mr McGovern: So if there was originally a overextended in credit terms. This is partly because safety net, and you are saying that eventually it was they have taken up these loans and the like which stripped away, I know contracts evolve and things have been sold to them by the banks. It has been change but if these people have the protection of a suggested to me that the staV were being incentivised trade union how did that happen? more to sell people loan products than they were to Mr McGregor: Again it is something, when we look sell them savings products. Is that correct? back historically, that we should have resisted more. Mr McGregor: Yes; in some institutions. It is done We should have insisted on greater protection going on a points-based system. Depending on the nature forward and certainly it has proved very diYcult in of the product we are talking about, you get a a number of institutions to secure negotiated Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor settlements on pay, largely because there is that bank, and it does not matter where you are, they are absence of that level of protection. It is quite bizarre, earning £13,000 to £14,000 a year for a fulltime six- if you look again at RBS in particular, that, over day week and they are working for companies which those ten years of record profitability each year and measured their profitability in the tens of millions we got to last year when they still reported £10.2 of pounds. billion of pre-tax profits, there were still many thousands of employees in the company who received no increase in base pay or below the rate of Q133 Mr Davidson: Given that it appears that inflation. As I have said on a number of occasions, bankers cannot be trusted to self-police, are you in the union was not able to reach a negotiated favour of having salaries and bonus arrangements, settlement for those very reasons. say, supervised directly by somebody like the FSA so Ms Dunsmore: To go back to the bonuses, the bonus that contract and the terms of bonuses cannot be structure is discretionary by management and it is agreed or implemented without some sort of external not a negotiable item whatsoever. The bonuses that involvement? It does seem very much as though it is came in for staV were an incentive to perform but a small clique deciding to award each other really they never came through the unions to ratify because very rewarding but short-term bonus structures. we would be looking for that to be in base pay for Mr McGregor: Yes; very much so. We would go pension purposes, et cetera. further than simply the monitoring of their pay and remuneration packages. We would also suggest there needs to be independent oversight of their Q129 Mr Devine: You have given us criteria for the appointment to ascertain their suitability and bonuses for the workers as such. Do you have any probity to undertake the role. We would want to see, criteria for the bonuses of senior managers whom we particularly not just for chief executives but are going to see? We would obviously want to ask individuals in senior managerial positions, that they that question. demonstrate an understanding of banking. Mr McGregor: No. Mr Boyd: May I quickly clarify the position? I should just like to emphasise that yes, the STUC Q134 Mr Davidson: Yes, I can see the point of that. would generally be against performance-related pay Mr McGregor: “Are you familiar with the type of because it does not work, particularly it does not product that you sell and the potential risk to your work in complex modern institutions such as banks. organisation in the event that they turn bad?” I do Incentive systems that the evidence seems to show do not think they are unreasonable questions to ask of work have to be linked to organisational any executive of any financial company, particularly performance rather than individual performance given what has happened over the last 18 months. and they have to be shared by everyone. So you will We are perfectly entitled to expect any organisation get something like the John Lewis system for that poses a potential financial risk to our economy instance, but, again to emphasise, anything which is to maintain the highest standards of professionalism related to decision-making the quality of which can of the individuals who wish to run these only be ascertained years into the future, not only organisations for substantial reward. does not work but the outcomes of it can be potentially catastrophic. Q135 Pete Wishart: Given the governance and the structure that we do find in banks, it is very diYcult Q130 Mr Walker: I was just about to say John Lewis to apportion blame for anything that has gone and profit sharing is a good thing though, is it not? wrong; it is always blamed on the culture. This is the We would agree with that, would we not? Sharing the thing which seems to be emerging in evidence that profits around with the workforce would be you give today. We even have a Prime Minister who something you would welcome. Not performance cannot accept any responsibility for what has gone related. wrong: it is everybody else’s fault other than his in Mr Boyd: If it is done in a way which is seen to be the way that he personally deflects blame. Do you fair and is recognised by the workers. think there is any chance that we can or do you think there is a real case that individuals can be held to Q131 Mr Walker: In an equitable way, as a shared account for what has happened in the past few enterprise. months? Mr McGregor: Yes, it is but, with the exception of Mr McGregor: At the moment, other than public John Lewis and one or two others, certainly from the outrage and disapproval, there does not appear to finance sector’s point of view, there are few examples be. We certainly argued for a public inquiry and frankly of where that kind of equity— investigation into the financial crisis and an examination of potential criminal activity, not just Q132 Mr Walker: But you would like to see more by bankers but financiers and speculators. At the examples. moment there appear to be no plans for such an Mr McGregor: Yes; very much so. To be perfectly independent public inquiry. We know the Treasury honest, we would quite happily do away with profit- has announced an inquiry but we strongly believe sharing schemes and bonus schemes and just pay that it is in the public interest and our wider people a decent basic salary.We are not talking in the economic interest that there is a full public inquiry millions or hundreds and thousands, just a decent and investigation into the impact and the basic wage. When you go into a bank branch of any background to this particular series of events. 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Scottish Affairs Committee: Evidence Ev 25

4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor

Q136 Pete Wishart: Do you think that should pretty much anywhere in the western world; higher include the way that the Government have than America, higher than Europe. Your employers approached the banks issue and of course over the are being pushed by Government to get the credit past ten years it has been this Government which has flowing—an easy phrase—taxpayers’ money is been responsible for the massive deregulation which being pumped in to try to get that going and as your has led to diYculty. Regardless of what the Prime members are often the front line, still being Minister might say, blame must be apportioned for incentivised probably to say “Would you like a decisions taken at ministerial level. Would that be mortgage? Would you like a loan?” has there been included? any eVort by your employers to say “Hang on. Yes, Mr McGregor: If there were an agreement to a full we want credit flowing but we have to be a little more public inquiry into the financial crisis, it is quite clear cautious”? Or is it just business as usual in a sense that an examination of the role of the behaviour of and they are still signing up a whole new raft of Government and ministers before, during and people who are going to go into personal debt and indeed after the crisis will be examined. I personally also just not actually checking that we have to put believe and the union believes that it will be an right some of the things we did in retail. opportunity for all parties to make a robust defence Mr McGregor: I cannot speak particularly about the of their actions but they should do that in the investment banking side but certainly in retail public domain. banking it is a huge concern to us that there has been Mr Boyd: It is also important to be reminded that the no significant change in the targeting regime which deregulation, which is really what matters here, exists. To answer your point directly, people are largely took place in the 1980s and although I would required to secure as many mortgage leads now as argue that the current Government are absolutely complicit in further deregulation and lax regulatory they were before the banking crisis. They are structures over the past decade we need to remember required to sell as many credit cards now as they were the opposition parties have often been calling for before the banking crisis. It comes back to the point them to go further in the wrong direction. We have we made earlier about the need for a cultural change heard, for instance, the First Minister of Scotland because, not just particularly at the chief executive arguing that in an independent Scotland he would level but all the way down the various layers of have regulated the financial sector in something akin management that exist within these organisations, a to the structures we have seen in Ireland and we have lot of people simply do not get it. They do not all seen what happened there. recognise that the whole structure, framework and culture of the industry has to change dramatically; there has to be a greater concentration on securing Q137 Pete Wishart: This is part of the problem, long-term savings, there has to be a huge move away deflecting the blame and blaming somebody else. from unsecured lending. In the short term that poses Mr Boyd: The crisis is best understood as a failure of adiYculty for those organisations but in the politics rather than a failure of individual politicians. medium to long term it is the only way the industry is actually going to survive. It is why we have been Q138 Pete Wishart: As far as I can see only one arguing very forcefully for a significant cultural shift. Government are responsible for economic macro I have to say we are not alone in that. There are other policy and to say that they should be absolved of any parts of the finance sector. We all talk about the sort of blame for this would seem absurd. banks but they are not the only part of the sector. If Mr Boyd: That is not what I am saying: I said you look at the mutual sector and certainly parts of precisely the opposite. What I am saying is that the the insurance sector, they have recognised for a long crisis is best understood as a failure of politics time that if the industry does not change its ways, because yes, the current Government was lax in its then their future is in doubt. There is a great deal of regulatory oversight, it was being pushed by other work to do because there is a lot of resistance within political parties to go further in the wrong direction, these organisations culturally to change their ways. including in Scotland statements from the First Minister arguing that an independent Scotland would regulate financial services as lightly as they Q141 Mr Wallace: I have a mortgage with the were regulated in Ireland and we have all seen what Chelsea and I am an existing borrower. So I get lots happened to the Irish banks. of oVers to carry on borrowing but I actually get oVers at quite a high level compared with the new borrowers. The building society is preoccupied with Q139 Pete Wishart: We will never get to solve the getting more people in the front door, not sure how thing as long as blame is being deflected. much they can deal with that debt, and in addition Mr Boyd: I am not deflecting the blame I am saying those existing borrowers who may find themselves in everyone is complicit unfortunately. problems are getting oVered higher interest rates Chairman: Facts have to be stated and we should rather than lower ones to make their transition listen to them. easier. I am worried when I come across constituents who are in debt. They are not in debt because they Q140 Mr Wallace: I should just like to talk about the have lost their job or they are not in debt because of future. We have had a credit crunch, the proportion serious problems, but because they are not getting of personal debt to income in the UK is the highest the benefit of some of the lower interest rates because Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

Ev 26 Scottish Affairs Committee: Evidence

4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor they are already gripped by the lender. Are you of Scotland?” there would be many hands to put up seeing more incentive on getting new people? and I guess that those hands should be counted now. Mr McGregor: Yes, it is certainly the case that there is greater incentive to generate new business, whether that is through mortgage applications or Q144 Mr Wallace: You said earlier that you were not credit cards or personal loans. alone in not noticing the scale of what was about to Ms Dunsmore: You have to look at the culture. If come. Do you think part of that was to do with the you have an existing customer, then you probably oV-balance-sheet ethos which had developed, where try to sell them a credit card or a loan, a mortgage, geared loans were sold on to investment companies house insurance, car insurance and everything. If oV the sheet? You were talking about the culture of you have a new customer, you have a basket of the customer and pushing debt, but there is also the opportunities. That is why the companies are culture of lack of transparency in the financial sector. pushing for new customers so that they can expose We have seen it in Government with PFI oV balance them to a myriad of debt rather than the customers sheet. We saw it in America with Enron and its whole they already have because they will have already existence. That has to go hand in hand with the pushed that forward. New customers are the reform. We have to have a really transparent balance opportunity they are looking for. sheet so shareholders, unions and employees can see to go along with the cultural change of pushing debt and things like that. Mr McGregor: I think that is right. It is not just oV Q142 Lindsay Roy: Are you concerned like me that balance sheet, but it is also the multiplicity, the there seems to be a propensity to look to blame one variety of the financial product and the distinct lack individual? I am talking here about responsibility of transparency around their construction and their and not blame. I think responsibility is multi-faceted sale. That is why we have a situation at the moment and therefore any inquiry should be looking to pick where all these institutions are reporting significant up these broad threads. Would you also agree that in write-downs. Our concern—and I know it is shared terms of the banks and the collapse of the banks, the elsewhere—is whether that is the end of it or whether human analogy would be that when somebody is there are more write-downs to come. That again gets suVering from cardiac arrest you want to make sure to the very core about a distinct lack of transparency they do not die so you are not going to ask questions in the financial transactions that have been about whether they have gallstones or an ingrowing undertaken and quite frankly should not have been toenail at that point? allowed to take place. Mr McGregor: I do understand the hesitancy Mr Boyd: Mr Walker referred earlier on to Alan around an individual being ultimately responsible, Greenspan’s “irrational exuberance” remark and but if we are talking about a particular individual, as suggested it was about eight or nine years ago; I in the former chief executive of the Royal Bank of think it was about 12 or 13 years ago. I think it was Scotland Group, I think there is no getting away 1996 and of course I referred to the early days of the from his personal responsibility for the parlous state dot.com bubble. To most people in those days there that company finds itself in. He is far and away not was a reasonably obvious disconnect between solely responsible but in terms of how the chief fundamental value and share price. The problem executive of that institution was allowed to act and over recent years in the housing and credit bubble is behave, previously supported by his previous that people just did not understand the root causes cheerleader the old chairman of RBS Sir George of this and they did not understand the complex Mathewson and the new chairman, which was Sir financial instruments and the creating of these Tom McKillop, it is quite clear that in both cases, on instruments that have caused so much of the trouble. the one hand you had a chairman who was egging on I know the constituencies you usually look to to be the young dynamic chief executive and when he was raising these questions, such as the press, were really replaced he was replaced by a chairman who actually behind the cover. There were a few notable should have been reining the CEO in. exceptions to that, but generally speaking the financial press and the business press acted as cheerleaders for this type of business model and Q143 Lindsay Roy: What about the political element there was not the type of investigative reporting that of it? There is a propensity in some quarters to try to we would have liked and would have hoped would pin blame on one political individual. have revealed some of these problems at an earlier Mr McGregor: No, I do not think there is much stage. cause for that. We are talking about huge systemic failure in the financial service sectors, the cultures within the institutions with the regulation of the Q145 Mr Wallace: And the non-executive boards industry and in terms of who is to blame for it failed to take that role if it was absent in regulation overall, there are many people frankly who should or in the public. be holding their hands up on that one. Mr Boyd: Absolutely. Ms Dunsmore: If you look at the question and you Mr McGregor: I think that is right. I know we have had asked that question 18 months ago “Who is to concentrated a lot on Royal Bank of Scotland but blame for the success of HBOS and the Royal Bank the acquisition of ABN Amro by the RBS should Processed: 12-03-2010 18:43:07 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Stephen Boyd, Ms Wendy Dunsmore and Mr Rob McGregor never have happened and the board should have Q146 Chairman: May I thank the witnesses for their been absolutely clear on that. However, we had a attendance. Before I declare the meeting closed, situation where it was the chief executive’s will and would you like to say anything in conclusion? they supported him on that and doomed the Mr McGregor: No; thank you for the opportunity. organisation. Chairman: Thank you very much for your time.

Witness: Mr Owen Kelly, Chief Executive, Scottish Financial Enterprise, gave evidence.

Q147 Chairman: Good afternoon. I would like to Committee today as an expert on banking but I hope welcome you to our session. Perhaps you could our perspective as a representative body is introduce yourself for the record and before we start nonetheless helpful. on the detailed questions would you like to make an opening statement? Mr Kelly: Thank you Chairman. I am Owen Kelly; Q148 Chairman: The economic prosperity of I am Chief Executive of Scottish Financial Scotland is dependent on the two biggest banks in Scotland, the Royal Bank of Scotland and HBOS. Enterprise. I will take advantage of the opportunity V you have oVered to make a few brief opening How much do you think Scotland will su er as a remarks really just to say how grateful I am to the result of the banking collapse? Committee for extending a second opportunity to Mr Kelly: Those two banks have for a number of come to talk to you, having been unable to attend at years been the biggest taxpayers, the biggest an earlier date. I am pleased to have this opportunity corporate taxpayers in Scotland, so that is a measure to contribute to the Committee’s work. I thought it of their significance. I think however that our might be helpful to the Committee if I just gave a industry is very diverse. I do not in any sense belittle very brief description of SFE and what we do. We are the importance of those banks and their central role the representative body for Scotland’s financial in the economy but I do think we need to keep in services industry. We were set up in 1987 as a mind that our pensions companies, which are again response from the Scottish financial community to 20% of those working in life and pensions in the UK, Big Bang essentially and some of the challenges work in Scotland. We should not underestimate the which seemed at that time certain to arise from that other components of the industry such as our fund historic change. Since then our membership has managers. Edinburgh is ninth in the world for fund grown very considerably away from the banks alone. management, which is really quite something, as well Many of our members today are multinationals as the asset servicing and other activities that I was conducting operations in Scotland in fields like asset describing. However, the global banking crisis and servicing and this reflects the worldwide growth of its impact on Scotland have been pretty grievous and that sector as well as the changing makeup of I try to keep a sense of perspective in that it has been financial services in Scotland. The point I am a global phenomenon. I was in Geneva just last week making is that our membership is now very diverse and there of course everybody was talking about and very broad indeed. As I am sure the Committee UBS; the roof was seen to be falling in. It is a knows, financial services continue to make a very worldwide phenomenon, but that is not to say it has large contribution to Scottish GDP; about 8%, not been damaging for our industry and for roughly one in ten jobs in Scotland are in the Scotland; it clearly has been. The impact that you are touching on is certainly very real. industry. Our member companies range from very large global organisations, including all of the high street banks to small specialist companies as well as Q149 Chairman: The Treasury Minister Lord fund managers, pension companies, insurance Myners has said that Scotland’s financial services companies and so on. We currently have 75 member industry is strong and diverse enough to weather the companies and that includes all of the high street economic downturn and in a better position than the banks operating in Scotland. Our main priorities are City of London. Would you agree with this? to work with Government and regulators and other Mr Kelly: I know what he meant by that. I do not policy makers to ensure an internationally think that we can be at all complacent but I think the competitive environment for our industry, to point he was making was—in previous discussion provide greater awareness and understanding of the the Committee has been discussing investment industry and to support debate and innovation. We banking, for example—in areas like that or in are a company limited by guarantee and our agenda trading or in some of the areas which have been very is determined by our members and we are entirely immediately hit by what has been going on, they are funded by our members. For the last year or so our not areas of activity which are particularly work has been driven by the extraordinary and prominent in Scotland. It is pensions, it is fund diYcult economic and financial events which have management, it is asset servicing. To some extent we caused such problems for our banks. The banks have some investment banking but nothing like the make up a small proportion of our membership in scale. I think what he meant by that was that the numerical terms strictly speaking but a very large makeup of the industry in Scotland might give us proportion in terms of employees and their influence some cautious confidence that we may be more on the wider economy. I do not come before the resilient overall. Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

Ev 28 Scottish Affairs Committee: Evidence

4 March 2009 Mr Owen Kelly

Q150 Chairman: How many jobs do you think we how these fund management companies can will lose in Scotland because of the merger of Lloyds continue to carry the same workforces on potentially TSB and HBOS? half the income that they were earning two years Mr Kelly: It is diYcult to put a figure on that and I ago. would not want to try to second-guess the companies Mr Kelly: There are probably three things. One is who have both made it clear that they will tell their cutting costs and there are other ways of cutting staV first when they announce any changes. To be costs and that is certainly part of it. Also some of the quite honest with the Committee, I am not sure it is companies were saying that there was still a net entirely a one-dimensional issue. Tesco Personal inflow of funds. What you say is true: there have Finance announced on Monday, as the Committee been large outflows. Nonetheless and I take at face may have seen, that they are setting up their HQ in value what I hear, there is money out there. There is Scotland. I would be astonished if that bank does opportunity that there are people looking to put not grow very, very considerably over the next few funds under management. Whether that is sovereign years. The signs are, looking at what RBS have been wealth funds or whether that is other options for saying, what Lloyds Banking Group have been wealth management, it is the case that there is still saying, that we may see a more measured approach business out there for fund managers but I do not to staYng reductions, retrenchment of HQ to disagree with your fundamental point that a decline Gogarburn. For example, Lloyds have been very in asset values will mean a decline in fee income. clear that they intend to run the high street brands in parallel for some time and so on. I do not think that Q153 Pete Wishart: Welcome to the Committee Mr we will necessarily see sudden large numbers and Kelly. I am just looking at the background to there are some countervailing trends such as changes Scottish Financial Enterprise and it says here that with Tesco, 500 jobs announced just last week in you are a representative body of the banking sector esure, the online insurance company. I am not for a and of sectors within financial services. It says also second pretending everything is going to be fine; I that the financial services industry employs over am not saying that at all. However, I do think that it 113,000 people with a further 100,000 in support is a slightly more multi-faceted picture. roles. What type of people are these? Are these people who work for the banks, management, what Q151 Mr Walker: Lord Myners has a great record in type of people are we describing here? fund management; he built Gartmore up three times Mr Kelly: Yes, it is people working in banks, people and sold it on three separate occasions but it cannot working in insurance companies, people working in have escaped your notice or his that the stock market quite large numbers in asset servicing, back oYce/ is nearly 50% from its high of less than a year ago. mid oYce activities, quite large numbers in The truth of the matter is that the fund management companies like HSBC, State Street, Citigroup, BNP business has laid people oV as well. If people do not Paribas, JP Morgan. These kinds of companies have have the funds to put in, these businesses do not quite large operations in Scotland where they are grow and they have to trim their costs. What is doing the business that lies behind a lot of happening in the financial sector up in Scotland? international trading. The other group you Mr Kelly: We had a round table discussion about mentioned there, the jobs which are indirectly this very question just last week and I suppose I dependent on the industry, they would be in would say that certainly round that table—and I will supporting activities, whether hotels, transport, that not mention particular companies—there was not as kind of thing. of last week an expectation of job cuts. There was a recognition that asset values are declining so that Q154 Pete Wishart: I am just trying to decide the increases pressure and a real sense of having to do diVerence between you and the trade unions. What more with the same number of people because costs sort of service do you provide? are absolutely being constrained. The other Mr Kelly: We are a membership body and all of our interesting thing I would just mention because it was members are companies; not only financial services an interesting comment was that those companies companies but quite a large number of our members were recognising an increasing burden of compliance are companies who have a strong interest in the that they were going to have to deal with as well. My continued success of the industry. That would be answer would be that we may not see again companies like Oracle, for example; you would not necessarily a reduction but we will see growing think of them purely as a financial services company business pressures on those companies largely due to but they join us because of the work that we do to a decline in asset values. promote the industry and to encourage continued growth and success. Q152 Mr Walker: I am not on the board of any fund management company; I do not think I ever will be. Q155 Pete Wishart: What is your organisation’s However, at the end of the day, most fund view of the bonus culture and performance-related management companies charge a percentage, 1% of pay? We now talk about the death of this type of funds under management. So if the funds under activity. Is that something your organisation would management have halved in value because the stock welcome? market has gone down and then people are Mr Kelly: We are living through a period of really withdrawing their money to fund their mortgage fundamental change for our industry. There has because they have lost their job, I do not understand clearly been a degree of excess in some of the money Processed: 12-03-2010 18:43:07 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Owen Kelly which has been paid and that is going to change. I made by Mr Walker, the decline in asset values, the was talking to an academic the other night whose decline in stock values, the general decline in overall speciality was the Wall Street crash and the value, just as in the fund management business there depression. He was making the observation that will be an impact, there will be impacts. We are there was a similar phenomenon before that already seeing it; in some pensions’ payouts there happened, where some people were making quite will be impacts. However, I do not think we are fabulous sums. Then one of the by-products which looking at anything like the deep-seated problems came after that was that that disappeared. I am not which have emerged in banking at all. for a second suggesting that that is some sort of positive outcome from what is obviously an Q158 Chairman: Would you support the interest rate extremely diYcult situation but I do think that we cap on borrowing and what impact will it have on have seen something like a bubble and one the financial sector? manifestation of that has been some really quite Mr Kelly: An interest rate cap on borrowing? inflated remuneration arrangements. Q159 Chairman: Yes. Q156 Pete Wishart: As politicians we are all grateful Mr Kelly: An upper limit on the interest rate which to banks just now because we are not the lowest of can be set by the Bank of England? the low; it is the bankers who seem to have managed to assume that particular title. When we are talking Q160 Chairman: The maximum interest rate that can about the regulatory regime—and we had a really be charged to the borrowers. Credit unions now have good session with the unions—we have been a cap of 2% per month that they can charge to their through this period now of a relatively lax and light customers. regulation. Is it now the case that maybe we will have Mr Kelly: I suppose my answer to that would be to to move towards a regulatory framework and is that expect competition between providers to meet that something your membership is anticipating and need. Recently obviously there have been questions even welcoming? around whether interest rate cuts are being fully Mr Kelly: They are welcoming it in the sense that it passed on and there is the question of collars on is clearly needed. The great question is how you some deals where there is a minimum which it cannot regulate in a way that encourages and facilitates go down to, although I am conscious that some competition on a commercial basis, but both customers are in a position where they are actually protects against the systemic risks which clearly were below zero or could be below zero under some not protected against under the systems we had, that systems. I would probably say that would be a rather is perhaps one of the greatest lessons. There were lots extreme step when we wish to maintain, as I think of people looking at lots of little balls but nobody most regulators and governments certainly do, a seems to have had their eye on the big ball. That is competitive system. It is diYcult to have a not a very good analogy but I am sure you see what competitive system where the interest rate is I mean. The other changes in regulation that we can removed as a competitive factor. expect and we should look ahead to are regulation and decisions on regulation being taken on a much Q161 Chairman: Are you aware then that credit more international basis. Although there is talk of cards and the banking system and the financial retreat from globalisation and so on, that is not institutions are charging people an interest rate of up going to happen, certainly not in financial services. I to 100%? do think that international cooperation of the kind Mr Kelly: I am not specifically aware of products we hope to see at the G20 and at EU level is really, where that happens. However, I would expect that really going to be an important part of this. where the customer has a choice, as most customers do, they would go to another provider. Q157 Pete Wishart: Just a constituency question. I know that you do represent more of the banks than Q162 Chairman: Unfortunately that is not here. I am financial services. I have the Norwich Union talking about the people who are the most headquartered in my constituency in Perthshire and vulnerable in our communities. They are the ones they are still currently recruiting which obviously as who are paying for the greed of the banks. Now the the Member is something I am absolutely delighted base rate is 1% and if people are charging up to 25%, about. Do you detect that the toxicity which exists 50%, 100%, even if they are charging 24%, that is within the banks which we have been discussing 2,400%. Do you not think there should be some earlier is beginning to seep through to the other moral or legal obligation on the banks and financial financial services? Should I be worried as a institutions about how they exploit the poor people constituency Member for Aviva, for example, that in our country? there are going to be issues down the line for my Mr Kelly: I am displaying my ignorance I am afraid, constituents? Chairman. I am not aware what kind of Mr Kelly: The answer to your question about Aviva organisations are charging those rates. is no, partly because they have made a very clear Chairman: I am talking about financial institutions. commitment to Perth as a centre of their training and educational excellence in what they do. Q163 Mr Walker: If a bank can borrow oV the Bank Certainly, talking to that company, you need not of England at 2% and lend it out at, say, 30%, that is have any concerns. However, going back to the point a 1,500% mark-up. Do you see what I am saying? In Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Owen Kelly percentage terms it is 30% but you are borrowing at prudence and so on may seem to have been more 2% and you are lending at 30% so it is a 1,500% damaged to those of us who are very close to it, as all mark-up. The other side of that argument is: should of us are, than it looks once you get across the banks be more proactive in saying to customers “We Channel perhaps, a little further away. I mentioned do not think you can aVord to borrow this money that in Geneva everybody is thinking about UBS and we are just not going to lend it to you”? Should and they are not actually wondering what is going on they be more responsible in their lending practices as in Scotland and in other financial centres, because opposed to just managing risk? The riskier the this has been a worldwide phenomenon. Just profile of the borrower the higher the interest rate because of where we are, we may perhaps they pay. overemphasise the international impacts on Mr Kelly: That is probably an inevitable Scotland’s reputation. I think it actually still holds consequence of what has happened. There is, as you up very well. know, in the banking industry a lot of debate and consideration of the notion of returning to what Q165 Mr Wallace: I just want to say, and I certainly some people might perceive as a slightly more old- think if you are a fund manager perhaps, when you fashioned approach. Certainly, talking to the have the two biggest banks probably in Britain, Chartered Institute of Bankers, a professional body called The Bank of Scotland and Royal Bank of in Scotland, they are very supportive of that and very Scotland, Royal Bank being the fifth biggest in the supportive of the re-assertion of the importance of world or something, getting pounded, part professional qualifications in bankers because that nationalised, that I am afraid sends a strong message includes a very substantial component relating to beyond the Channel, beyond the Atlantic. A lot of ethics and the kind of thing you are touching on, the phenomenon you talk about was debt fuelled concern for the customer and so on. I think my and that fuelling of debt, that impetus of debt was answer is yes. partly encouraged by a government which encouraged debt. As long as we had a booming Q164 Mr Wallace: You obviously represent a range house market, as long as we had lots of people of members who make their money out of either paying stamp duty, as long as we can keep spending, wealth management or lending or savings. What I then we will be all right. Do you think it was a debt am interested in is whether you think part of the fuelled crisis? contribution to a lot of this credit crunch was that Mr Kelly: I think debt played a very, very major part there was a culture which encouraged borrowing? It in it. You are inviting me to criticise the UK was better to be a borrower than a saver and the Government particularly. I think it is quite easy to Government’s mantra was always, every line out of feel that they bear a particular responsibility here. I the Chancellor’s mouth, “Lowest interest rates since suppose my own view would be—and we are a . . . blah, blah, blah” which was fine if you were a completely non-political body, so I am not just borrower but not so fine if you were a saver. Have trying to wriggle out of this—that if you felt that, you seen with the people you represent that this you would make the same point in relation to the US credit crunch has forced them to change their views Government certainly and a good number of other and say that what they really want to be about is governments as well. What we have seen is a really managing wealth, not lending? Therefore you have remarkable thing, which happened internationally seen a drift from people investing in lending almost across the board and was not foreseen— institutions. I know it is not as simple as that but the though not entirely.I am certainly conscious of some great thing about Scottish financial wealth people, who genuinely claim to have seen what was management was the cautious Scots in Edinburgh happening and to have had a clear eyed view of it, managing wealth cautiously, low risk. That is what but there has been an enormously wide-ranging made our name and along came Fred the Shred and collective missing of the point and I do not think, threw that all out of the window. That is what I looking at governments around the world that the think, that there was a culture. Do you recognise that UK is especially culpable amongst governments. needs to change or is it still there? Mr Kelly: I think you are right about the culture. It Q166 Mr Wallace: We are talking about extra was extremely widespread; it was not only in this regulation and there is a diVerence between strong country but worldwide and we know it was fuelled regulation and complex regulation. Up to 1997 there by other factors such as a huge increase in exports was the Bank of England. Along came a tripartite coming from China and so on. To answer your system and across the board people have criticised question specifically, is that culture changing, yes, it the complexity that went along with the regulation. is. It is being forced to change. There is not only a The problem is not too little regulation but too much greater focus on risk, which was touched on complex regulation which therefore made it very earlier, but also in the recognition that there has to hard for people to see their way through, for non- be tighter management of lending across the board. executives to make a judgment about how far people May I just pick up one thing you said? You were over-extended. People could not see the wood mentioned the Scottish reputation for being canny for the trees. What are your thoughts on that? with money and you made the point that perhaps Mr Kelly: Certainly that is something I know several what has being going on at RBS has damaged that of my members would agree with, that the approach reputation. There is certainly some truth in that but to regulation has been quite bureaucratic and quite I do think that Scotland’s reputation for financial burdensome and it is also clear, even though that Processed: 12-03-2010 18:43:07 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG2

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4 March 2009 Mr Owen Kelly may have been the case, that it did not work at the Q169 Mr Wallace: When the Chancellor said in systemic level and taking that much broader view. April 2008 “I am able to report that the British There is a big question, a very big question about the economy will continue to grow through this year and systemic oversight and I suspect the tripartite system beyond” do you not think that might have been a bit will have to be adjusted at least to put that more of a surprise to many of your members that there was clearly in place. I would also say though that I do not an optimism further down into the year that did not think this is just about more regulation or even reflect people on the front line? diVerent kinds of regulation which simply involve Mr Kelly: Among some of them that would certainly more questions and more analysis. I come back be true. You can find companies and individuals; perhaps to the fact that within the industry there are famously there is Paulson’s hedge fund which made several professions at work: we touched on the a fortune by seeing what was going to happen. There banks but there are lawyers, there are accountants, were people who could see it happening, see it the actuaries. What those professionals have in coming, but I would not say that there was a kind of common is that because they are professionals they industry-wide view. I am pretty sure, just with our have a sense of wider duty, a duty to take a wider own dealings, which are quite extensive, with the UK perspective, other duties of care beyond perhaps Government that that would certainly have reached the Chancellor. simply complying with regulations which come out of any particular regulatory body. We should also bear in mind that it is not just about the rules and Q170 Mr Wallace: Were you surprised? how many there are and the nature of them but it is Mr Kelly: Was I surprised at what happened? also about culture. One of the things I think we in Scotland can contribute to the EU debate—and Q171 Mr Wallace: At the Budget of 2008. certainly that is something we are going to be Mr Kelly: I think I thought it was optimistic. looking to do—is around this and the role of professions and the role of ethics in the revised Q172 Chairman: Small- and medium-sized approach to regulation which is going to come out at businesses in my constituency tell me that banks are EU level. increasing arrangement fees, overdraft charges, penalty charges, service charges and they are not passing the cuts in the base interest rate to their Q167 Mr Wallace: With such a broad range of customers. What can the Government do to make members and huge numbers of people involved that sure, especially those banks who have received you represent, may I ask when you as the trade billions of pounds to rescue them from going association first got a feeling that something was up? bankrupt, how can the Government force the banks Beginning of 2008, end? When were feedbacks to change their irresponsible behaviour towards coming in that there might be a problem? small- and medium-sized businesses? Mr Kelly: I only came into this job in January 2008 Mr Kelly: You raise a very interesting question. so I should say that upfront. However, it is probably What we have found in talking to our members, fair to say that, certainly when I was appointed, whether it is the Clydesdale or RBS or any of them, there was a very clear sense that something was up. is that they will say they are open for business, that Looking back a little further, you will certainly find they are lending more than they did last year; I think that some of the fund managers in Edinburgh had Clydesdale are 10% up and RBS is about the same. been very light on their investments in financial However, I am very conscious that for companies stocks for some time. So there were certainly some like the ones in your constituency there is almost a people who, on a professional basis, had seen that. disconnect between what the banks say and what people are saying. What seems to me to be going on There is a Scottish economist who works out of is that the money which has been put into the banks Hong Kong called Jim Walker. He runs a company is to recapitalise them and it is not money they called Asianomics and because of the papers he has receive and lend outwards. We are all familiar with produced and the analysis he has done he can show the nature of the credit crunch and the fact that the that he did see all this coming. availability of capital on the markets has dried up giving rise to these problems for the banks in not having money from sources they have completely Q168 Mr Wallace: Is he a member? grown accustomed to. The other significant factor Mr Kelly: No, he is not actually. He should be but he has been the withdrawal from the UK of a great is not. He is just one example. The other one which number of foreign lenders; most famously and sticks in my mind in terms of ringing alarm bells at obviously the Icelandic banks because of what an early stage is the Bank for International happened to them but others as well. That is roughly Settlements. We were talking about systemic risk; 20% or so; a very significant withdrawal. The other you could say that organisations like the Bank for factor is that for some—and I do not include any of International Settlements are as well placed as the companies in your constituency in this— anybody to assess some of this. Within our companies wishing to borrow, the risk as perceived organisation, certainly all the time I have been in it by the bank has changed. That may be because of is the answer. Beyond that, looking a little bit further declining expectations of sales or perhaps that the out, I think you would probably find it was two or value of property that they may be using as collateral three years ago. has very likely declined just because of declining Processed: 12-03-2010 18:43:07 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG2

Ev 32 Scottish Affairs Committee: Evidence

4 March 2009 Mr Owen Kelly values in assets. It is a slightly more complicated Q178 Chairman: Competition has failed these situation than simply the banks taking money from people. We conducted an inquiry into poverty in the Government and hoarding it. There are good Scotland and something which was astonishing to us reasons why: because of the capital requirements was that a lot of people are caught in the vicious which are placed on the banks, that they have to poverty circle because they have borrowed £2,000 or meet those requirements imposed by the regulator £200 from these financial institutions. That is why I and so on. In answer to your question about what think we should have a cap on interest rates like more the Government can do, the recent some other European countries. announcement of the insurance scheme that RBS Mr Kelly: It is not actually something we have done has bought into in a very large way and Lloyds is a great deal of work on. I can understand the concept expected to, that is the kind of step which should but I do think it raises questions about competition. allow the banks to lend in a way that hopefully does not compromise the risk assessments that we want them to make. One of the problems we have been Q179 Mr Wallace: Some of your members are discussing is that risk assessments have not been wholly independent fund managers but a lot of them that good. are asset management belonging to an international bank. How much is Scotland in control in that sense Q173 Chairman: No, what I am trying to say is that of some of those companies. If you are Gartmore or the burden from the banks in terms of interest rates, something, you might have an oYce there, you in terms of commitment fees, in terms of overdraft might be centred in Edinburgh, but the reality is that charges is increasing on the businesses despite the you are owned by an American or Dutch bank or reduction of interest rates to 1%. For example, one whatever. How much can Scotland actually do to business approached me and their arrangement fee support subdivisions of the larger overseas bank? has been increased by 15 times. If they were giving What proportion are overseas or headquartered 0.1%, now they are giving 1.5%. London banks which just happen to have their asset Mr Kelly: I do not particularly want to comment on management based in Edinburgh? that individual case because I do not know why. Mr Kelly: I am afraid I could not give you a figure for the proportion, but you are absolutely right that Q174 Chairman: When they challenge the bank they companies like Aegon, Bank of New York Mellon, are told they can go elsewhere. They know that in Newton, these are companies which are large this diYcult environment it is not easy to find a companies but they have significant operations in new bank. Scotland. Where we can support them and Mr Kelly: As I said, I cannot comment on any encourage them is that the reason they are in individual case like that but it is clearly a very stark Scotland is the community of investment illustration of the rising costs. professionals we have, the skills that we have, the history that we have. As long as we can continue to Q175 Chairman: Give me your view then. When the attract those kinds of companies, then we will Bank interest rate is 1%, what is the maximum maintain that critical mass and we will ensure, even interest rate banks and financial institutions or in these diYcult times, continued success in building societies should be charging which you investment management. believe is reasonable; the maximum. Mr Kelly: It is diYcult to say because every case is diVerent. One of the things we surely want the banks Q180 Lindsay Roy: In your opinion, how well do the to be doing is being better at assessing risk. They functions for the oversight of the executive of large have been accused of reckless lending so a lot of banks work? factors ought to come into that equation which will Mr Kelly: Do you mean the senior level executives, determine the level of risk and then the banks should as in the boards and so on? price that risk appropriately and they should lend at that rate. In that sense each decision has to be based on the factors of the case. Q181 Lindsay Roy: Yes. Does it need modification? Does it need overhaul? Are there examples of very Q176 Chairman: If somebody borrows money from good practice and examples of pretty poor practice? the bank, say £500, and pays back £20 a month to the Mr Kelly: I see exactly where you are coming from. bank, which is £240 on £500 borrowing and the There is clearly a need for a fresh look at this. I borrowing increases from £500 to £550, do you think suppose I would point to the role of institutional that is reasonable behaviour for the bank and legal investors and what role they could play in this. There financial institutions? have been some who have said they made their views Mr Kelly: It depends on what the risk is and so on. known many times to the board of certain It is diYcult to say without having a particular case. companies and they were not listened to and so on. The systems that underpin that kind of dialogue Q177 Chairman: One should appreciate that the perhaps merit a look because at the end of the day interest rates banks should be allowed to charge investors play a very significant role in influencing people should be reasonable. and directing a company. I hope this will come out Mr Kelly: Yes, I agree and I think competition of the various reviews of regulation that are going on between providers should ensure that. at the moment. 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Scottish Affairs Committee: Evidence Ev 33

4 March 2009 Mr Owen Kelly

Q182 Lindsay Roy: Governance structures of some FSA to adequately monitor the practices and banks seem to make it diYcult to hold individuals to procedures of some of the largest financial account. Culture is blamed and it would appear institutions in this country. The financial system can there is no proper accountability. To what degree is no longer be a gravy train for the few at the expense it reasonable in these circumstances to identify of the many and their homes, pensions, livelihoods individuals? and communities”. What would you say to this? Mr Kelly: If you are looking at a situation where Mr Kelly: I think I broadly agree. Hector Sants, the there have been collective and systemic chief executive of the FSA has been quite open in shortcomings, it is diYcult to blame individuals. I do apologising and accepting the failings of the FSA. I not think there has been any suggestion in any of the do not think it is defensible that there should be companies that have faced great diYculty so far that fabulous levels of personal reward at a time when the there has been any element of wrongdoing. There are economy is facing a great deal of diYculty. I may not clear boundaries between error and anything which have used those words, but I do not particularly take might constitute wrongdoing. My own view would issue with what the union are saying. be that the relationship between the success of a company and its shareholders and other Q185 Chairman: They have also suggested that there stakeholders should be the basis for assessing both should be “ . . . trade union representation on the reward and any action in the face of shortcomings. I boards of all key agencies involved in the regulatory do not think those mechanisms have worked 100% system”. Would you agree with this? well looking internationally around the world, Mr Kelly: I certainly think there is a strong case for looking at examples, not Scotland particularly but a greater degree of external perspective being one can look at America as well and Switzerland and brought to bear. Whether it is only the unions which see significant shortcomings. In answer to your should be brought in or whether it should be a wider question, I personally do not think there is that process, I am not sure, but the principle I agree with. much to be gained by trying to assign individual culpability to what is clearly a systemic failing. Q186 Chairman: Thank you for your attendance. Before I declare the meeting closed, would you like Q183 Lindsay Roy: You seem to be saying it is gross to say anything in conclusion? errors of misjudgment that might be responsible as Mr Kelly: Only thank you very much. I have enjoyed opposed to highly irresponsible risk taking. Would it and we do plenty of work with the devolved that be fair? government and Scottish Parliament but we also Mr Kelly: Yes; I think so. devote a lot of our eVort to working with the UK Government. We are obviously very mindful that it Q184 Chairman: We have received a memorandum is the powers of this Parliament that have perhaps from UNITE in which they say “Unite is the greatest direct influence on our industry so thank disappointed with the role the Financial Services you very much. Authority (FSA) has played in regulating the finance Chairman: Thank you. I think your comments made sector and in particular the apparent failure of the my colleagues very happy. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [SE] PPSysB Job: 439642 Unit: PAG3

Ev 34 Scottish Affairs Committee: Evidence

Wednesday 19 March 2009

Members present Mr Mohammad Sarwar, in the Chair

Mr Alistair Carmichael Lindsay Roy Mr Ian Davidson Mr Ben Wallace Mr Jim Devine Mr Charles Walker Mr Jim McGovern Pete Wishart David Mundell

Witness: Mr Gordon Pell, Deputy Group Chief Executive, Royal Bank of Scotland Group, gave evidence.

Q187 Chairman: Good morning. I would like to support that we have received from the UK welcome our first witness to today’s evidence session. Government during the exceptionally diYcult Perhaps you could introduce yourself for the record. conditions we have seen in the economy in the last Before we start on detailed questions, do you have year. Virtually every bank in the world now is in some any opening remarks you would like to make? form of government support. It is no pleasure to say Mr Pell: Thank you very much and good morning. weare notalone,but thefactoflife isweare notalone. My name is Gordon Pell and I have been recently Banks are systemically important to the economy, appointedasDeputyChiefExecutiveofRBS.Forthe and I think that is something that people have tended last eight years, I have been running a range of retail to forget in the last ten years during the almost businesseswithinthatgroup,bothhereandintheUS. unlimited boom most economies in the world have I would like to take this opportunity to say on behalf gone through. We have come back to that realisation of the bank that we understand we are in a privileged with a bit of a shock. It has not been a pleasant position with the amount of taxpayer support we experience for us; it is not a pleasant experience for have standing behind us. We take that support very our customers; it is not a pleasant experience for our seriously. It comes with responsibilities and we are staV. To touch on the issue, though, we are determined to discharge them. I also know that in determined to use that support as a way of, first, many cases that responsibility is particularly evident supporting the UK economythrough the diYcult few in relation to our shared interest, which is the number years ahead. We have a joint responsibility with our V of sta that our bank has in Scotland and the number major shareholder and we work very closely with of customers that we have there. I have been in UKFI—we are now in almost daily touch with banking for 40 years, having started as a cashier in a them—in terms of the responsibilities we share, Lloyds Bankbranch inSouthampton. This isnow my despite thefact that,as faras possible,we willattempt third serious recession that I can remember. I think to manage this business as a free-standing therewas onewhenI wasastill ajuniormember ofthe commercial entity. There are realities, there are staV. The current conditions we face are most conflicts in that, and we will have to try to manage extreme, though, of those three particular situations, that sensibly and responsibly over the next few years. and with my responsibility for our retail business in The one thing I can tell you is that bankers are never the US, I see this through several lenses. I hope these popular. I think we should just accept that. We were experiences, both in the UK and in some of the other never popular during the boom. We are either countries in which I work, will help support the Committee with the evidence during today. I would unpopular for saying yes too often or we are just like to make the point, though, that that unpopular for saying no too often. That, I think, is a particular constituency in which manyof us have that reality. On balance, as a retail banker of 40 years’ joint interest—our staV and our customers in experience, I find it more comfortable, to be honest, Scotland—is foremost in my mind and foremost in to be unpopular for saying no too often. That is the my responsibility of leading this business back to a reality. The situation we face at the moment is Y standalonepositionasa privatecompany.Thankyou di cult. We need to work with customers through a Y very much. di cult period, but, quite frankly, I cannot insulate our customers and our staV on the conditions that this country faces. All I can try to do is act responsibly Q188 Chairman: Thank you. UK taxpayers are and ethically to try to manage through the diYcult shouldering billions of pounds with your bank while few years ahead of us. The lending commitments that ordinary citizens face hardship, mortgage-holders we signed into at the time of our entry to the Asset are facing repossessions and the withdrawal of Protection Scheme—in some ways Asset Insurance longstanding overdraft facilities by the banks, and Scheme is a better description—is a first step towards while businesses face bankruptcies. What do you recognising that responsibility. have to say to the British public? What assurance can you give to these businesses and what sort of support is available? Q189 Chairman: If a shop manager ran his Mr Pell: There are a number of points and perhaps I employer’s business to the ground, he would get the can deal with them separately, but, first of all, can I sack.Canyoutellthe Committeewhythenormalrule reiterate that we are extremely grateful for the of business should not apply to you? Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

Scottish Affairs Committee: Evidence Ev 35

19 March 2009 Mr Gordon Pell

Mr Pell: The rule of business, regrettably, in that opposite direction. I agreed to stay on to help famous weekend during October did apply to us in Stephen Hester see through his arrival and see him spades. The responsibility was recognised and into his first position and then discuss with him my accountability was doled out and the Chairman, the views on what we could do to put things right. As a Chief Executive, the Director of our investment result of that discussion I was asked to stay on, to banking division who was at that time mostly my defer my retirement and step up to be Deputy Chief colleague responsible for what I call the other half of Executive, to help him manage this bank through to the bank, all departed rapidly thereafter. Within the a stronger position and hopefully to repay the businesses which caused most of this problem, I taxpayer with a profit. would like to say that, of my 170,000 staV, 99% of the problem fell in areas only managed by probably Q192 Mr Walker: You mentioned that V 5,000 of them. The vast majority of sta that you remuneration had been looked at. Has your face up to in our branches in the UK quite frankly remuneration increased with your promotion to had nothing to do with this and I feel deeply for them Deputy Chief Executive or did you pass an increase and somewhat ashamed of the position we have put in your salary? them in. But the management did recognise the Mr Pell: It was not even discussed. That would have issues. We have also substantially changed our been quite outrageous even to raise the issue. remuneration policies—which I do not think in any case were at the aggressive end of what is out there in the market—as you will know, jointly with UKFI. Q193 Mr Walker: Can I ask you how much you We now probably stand in the cleanest position in earned last year in your report and accounts? terms of banking remuneration in the world and, Mr Pell: Yes. £908, 000. quite frankly, that causes me considerable competitive problems because I still have to face oV Q194 Mr Walker: Is that total remuneration, to banks that do not have those forms of restrictions. including pension contributions? Mr Pell: Yes, since I do not make any pension contributions. Since the days I entered Lloyds Bank Q190 Mr Walker: You said that 99% of the staV you as a clerk some 40 years ago, because I think that is are directly responsible for were not responsible for what you were meant to do, I have been member of the cataclysmic losses at Royal Bank of Scotland, a defined benefit scheme in three banks: 11 years as but I notice that you joined the board of Royal Bank a clerk, some 20 years as a manager, and 10 years as of Scotland in March 2000. What did you personally a main board director of three of the largest do to persuade Sir Fred Goodwin from this suicidal companies in this country. course of action he led your bank down? You were on the main board with him. What will the record show you did to try to stop this car crash from Q195 Mr Walker: Do you think you oVer value for happening? money at £908,000 per year? Mr Pell: As a member of the main board during that Mr Pell: I quite accept the figure concerned sounds period, obviously I take collective responsibility for ludicrous to many people in this room. No question all the key decisions made during that period. I know whatsoever. However, probably even now, even in trying to defend Fred at the moment is probably our currently dented situation, our losses, which you mission impossible, but if you go into Google at the described as disastrous, still rank not in the top ten moment and Google Sir Fred Goodwin you will find in the world, I am afraid to say, in terms of banking there are well over 40 pages and it is a matter of fact losses. My remuneration ranks similar to my peers in that I would say at least 25 of them recognise his other organisations around the world. We can argue many skills, his many strengths, and the huge about whether that is a good peer group to be in, but contribution he brought to Scotland during most of that is a fact. this period. In retrospect, when the dust has settled, we will look at a more sensible story about the Royal Q196 Ben Wallace: I am not going to go down the Bank than the one we obviously live at today. But path of roasting the bankers, but looking at your CV, today we are in today’s problem. you are a banker and you have been a banker from the start. One of the characteristics of this issue is Q191 Mr Walker: Are you suggesting that the story that there have been an awful lot of non-bankers about the Royal Bank of Scotland is not sensible, running banks. Lord Stevenson has never run a given the fact that we are supporting it to the tune of bank. Your successor or predecessor at Coutts was tens of billions of pounds? Do you believe that a marketing manager or director of another group. somehow we are doing it a disservice at the moment? Where did he come from in Coutts? Mr Pell: No. We are not doing it a disservice at all. Mr Pell: Do you mean Andrew Fisher? At the end of the day in business you are judged by your last deal. Our last deal was bad. It was the Q197 Ben Wallace: Yes. wrong time, it was the acquisition of the wrong Mr Pell: You are very well informed. Andrew was a business. There is no question whatsoever. Going marketing manager by background, an extremely back to my own personal position, at the time of the accomplished one, but for a while was involved in October event I oVered my own resignation. I was running Standard Chartered Private Bank, so I assured by the board that not only did they not wish think you would say he knew a little bit about me to go but in fact their views were very much in the banking. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

Ev 36 Scottish Affairs Committee: Evidence

19 March 2009 Mr Gordon Pell

Q198 Ben Wallace: That was at the end of his career. country and the staV in your constituencies from the Mr Pell: Yes. fact that along with virtually every business in this country we are going to have to realign our costs to Q199 Ben Wallace: I think the point was that you are our income. But most of the cost savings we are quite a lonely soul in some of these decisions. You looking to achieve will be in those businesses which are a banker, but, apart from Fred the Shred an are most hit and a fact of life is that it is the global awful lot of the others, all your governors and non markets businesses in London which caused most of executives, et cetera, have not necessarily been. Do this problem. They are taking a very significant hit in you feel part of this problem is that everyone knew terms of cost reduction even as we speak, along with that the ABN Amro merger—that is, everyone all the investment banks. A number of our except perhaps the board of RBS—would be a businesses abroad are suVering, in some ways, worse wrong move. Did you think it was the wrong move than the UK. For example, strangely enough in at the time? Asia, the rate of decline in Asia from a higher base is Mr Pell: Shall we just step back a bit. It clearly was probably steeper than here. We are already shedding the wrong move because at the end of the day— significant numbers of staV in Asia and in America where the economy is probably a year ahead of here V Q200 Ben Wallace: I mean at the time. I understand down the slope. The e ect in the UK is, as yet, least that you are bound by collective responsibility, but marked. We are trying to protect those businesses did you think it was a wrong move at the time? which are core franchise. In Stephen’s review he has Mr Pell: No, I did not, because, as I said, I was made it very clear that the business is to concentrate involved, we went round the table and we voted, and on its core franchises, its retail franchises (my there was not a single dissenter. Neither, I think, was business or my successor’s business as hopefully as I there on the Barclays board—who were desperate to can arrange it) in the UK and in America. We also get the bank, if you remember. It is no consolation have an excellent retail franchise. to me, but if we had not got it, you would probably have Barclays discussing this issue with you here Q203 Mr Devine: Sir Fred does not seem to be today. We were not alone. Ninety-five per cent of our downsizing, I have to say, in the way that everybody shareholders agreed with our judgment, the FSA else you are suggests seems to be. Who negotiated his agreed with our judgment, and the Dutch National pension plan? Who agreed the pension plan? Where Bank, which, quite frankly, had only one axe to is the payment coming from for his pension plan? Is grind—which was to avoid a major Dutch icon being it coming out of the pension pot that the rest of the bought by a Scottish bank—after due diligence had workforce are contributing to or is it coming out of to agree that the transaction made sense. money that we have lent him as taxpayers? Mr Pell: To try to draw a veil as quickly as we can Q201 Ben Wallace: They might have thought that over the Fred pension wars issue, the issue of Fred’s but let me tell you the markets did not think and a pension is obviously under discussion between our lot of experts in advance did not think. We are not new Chairman, Sir Philip Hampton, and our idiots. A group of people might have supported it, majority shareholder. but in general the market thought that it was a pretty bad decision. Could you tell us how much of your Q204 Mr Devine: I am sorry, we are not going to loss, the £24 billion loss, is made up of a contribution draw a veil over that. It is a matter of major concern. of that decision to take on ABN Amro? As MPs, every time we walk down and meet Mr Pell: This was a question asked by Stephen constituents it is raised with us. It is a running sore Hester and I think there is a rough allocation of that we want to sort one way or the other. Can you somewhere between 50 and 60% that you would deal with it, please? loosely ascribe to ABN Amro booked assets. Can I Mr Pell: As I said before, I am not trying to draw a just pick up your comment about markets? The veil over it but the answer is relatively simple from market, of course, have an absolute right to say that my point of view. The issue is under review between but a fact of life is that 90% of the markets voted for our new chairman and UKFI. Lawyers are involved the deal. One of the points made by Lord Myners is on both sides, both looking at the facts of who that perhaps shareholders ought to step up and be agreed what on which day—and that was touched more vocal and show the powers which they hold. on at the Treasury Select Committee over an extended period yesterday with Lord Myners—and Q202 Ben Wallace: Such a huge amount of loss was what can be done to do something about it. As we about the ABN Amro takeover but the workforce in are in that situation, I personally cannot comment the commercial and retail banking are going to have until Sir Philip has come up with his conclusions. to take the consequence for that. That is decidedly But perhaps I could touch on my own role in it, just unfair, that a takeover gone wrong is now going to be to make it simple: as an executive director of the borne on the chin by those people perhaps starting bank, I am not involved in any way with the where you started, as a cashier, as a result of that. remuneration discussions or the departure Mr Pell: I think you have just practised my speech arrangements of any of my colleagues, and least of to Stephen Hester for me, because obviously I all my boss. I was not involved in any of the represent the vast majority of those people. One of meetings, I am not involved in any of the letters the things we recognise is that we cannot disconnect concerned, so I know bring no deep personal the bank and key staV who work for me in this insights into the issue, I am afraid. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

Scottish Affairs Committee: Evidence Ev 37

19 March 2009 Mr Gordon Pell

Q205 Mr Devine: So a decision was taken, according discover. That is a matter of record. However, I think to press speculation, to spend around £32 million it is true to say that the one distinguishing feature in and you, as the second senior manager in the the catalogue of shame (if I might use that company, were not— expression) in which all bankers sit at the moment, Mr Pell: At the time the decision was made, I was an is that, while that was going on, at a crucial moment executive director in charge of the retail business. in history and a crucial moment in terms of our Those decisions were made by the remuneration capital position we embarked on the acquisition of committee of the bank, which is staVed by non ABN Amro. So if you had to choose a distinguishing executives. I would not have been involved in that factor between us and some other banks, the decision. It would have been totally inappropriate acquisition of ABN Amro increased our bet on for me to be so. That is how corporate governance investment banking—even Turner uses the word works in the UK. “casino” type business—at a time that also depleted our capital reserves. For better or worse, it put us in Q206 Mr Devine: What pot does it come out of? Is it a weaker position to cope with the tsunami that was the pension pot or is it money that we have— coming out from the US. Mr Pell: This is a complex issue. The best thing I could do is to provide you with all the letters which I think are now a matter of public record, which have Q211 Mr Carmichael: The feeling I am left with— been given to the Treasury Committee.1 Idonot and you have been on the board since 2000, so you pretend to be a pension expert and I think I would have had nine years, but if you were to remain on the only get it wrong if I tried to explain it. It is all a board for the next nine or ten years—is that you matter of public record now, freely available. would not be doing it that much diVerently, you might just not do it as extravagantly. Q207 Mr McGovern: Following on from Mr Mr Pell: I think the reality is we would be doing a lot Devine’s questions, are you unaware of where the diVerently. It is just a matter of record that, although money is coming from? we turned in a loss last year, what I call our “core Mr Pell: Sir Fred’s pension pot, as I understand it— businesses”, which is 90% of the people and because I have the documents more than you, but I probably 100% of the businesses that we will have in have not been involved in the discussions about three years time, turned in a profit of the best part of them, I was not involved in negotiating them—is £4.5 billion. held by the bank. EVectively it is covered by the bank as what I loosely call a “pension promise”. Unlike Q212 Mr Carmichael: I do not want to be obsessive me, he is not a member of the bank’s pension fund. about Sir Fred Goodwin, but all you are really I think that is probably the distinction you are telling us is that in a mad world he was the maddest looking for. and you think for that reason history will be kind Q208 Mr McGovern: So this is coming from the to him. public purse. Mr Pell: No. As the only Englishman on the board Mr Pell: It is coming from what would have been the of the Royal Bank for about four or five years, one bank and the bank happens to have a significant cannot look at Scotland and the contribution that shareholder from the British Government. the Royal Bank has made to Scotland in many ways over the past ten years and just write them oV at the Q209 Chairman: Could you drop us a note? moment. At the moment we are at a low ebb. We Mr Pell: I can send you the entire file, yes.2 have a huge responsibility to get ourselves back up and running. We have powerful businesses in there. Q210 Mr Carmichael: I think we are shutting stable I will give you a simple example: I used to drive in doors on that. I am intrigued though, Mr Pell, by three or four times a week past the Gogarburn site. your statement that you are judged on the basis of It was as derelict building, as you probably your last deal and your suggestion that history will remember; no testimony to anyone. If you drive in be kinder to Sir Fred Goodwin than a contemporary there now it is one of the finest world-class centres/ Y analysis. This is important, given the way in which head o ces in any country in the world. A world- this bank is expected to go forward. Is it your view class business school. You cannot just forget that that, but for the acquisition of ABN Amro, the and move on. That will still be there in five years time Royal Bank of Scotland was faultless? when we have dealt with this issue and the bank has Mr Pell: No. If you read the Turner Report which repositioned. has come out today—and the issues over the last ten years are complex—I think there is a very reasoned Q213 Mr Walker: How much did that building cost? assessment in there. Governments are involved, Mr Pell: I have no idea. I could find out. regulators are involved, banks are involved. RBS expanded too fast in various areas of the US, into areas, quite frankly, that in retrospect we did not Q214 Mr Walker: This is your headquarters? understand, and neither, quite frankly, did any other Mr Pell: The Gogarburn site. bank in the world, least of all in the US, as we now

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Q216 Mr Walker: So let us forget about the tens of Manchester or Leeds at the moment. There is billions you have lost because that is all made up by absolutely no demand and I would imagine prices the fact that you have a swanky HQ. That really is have fallen by 50 to 70%. pretty thin gruel for this Committee. Mr Pell: It is not a swanky HQ. Q221 Mr Carmichael: Do you think there is such a thing as a Scottish housing market? Mr Pell: It appears to have certain diVerent Q217 Mr Walker: You just said it is a swanky HQ. dynamics. There is definitely a thing called the Mr Pell: I did not use the word “swanky”. Those are Scottish economy. It tracks the UK. your words. I said it was world-class and I would hope that that is the standard at which Scotland Q222 Mr Carmichael: As a former solicitor in would wish to ask. Aberdeen, I would not recognise the housing market in Edinburgh or Glasgow as being— Q218 Mr Walker: I do not think you have grasped Mr Pell: Edinburgh and Glasgow clearly have more what you have done. You are somehow saying that characteristics. They have had a faster incline and a building compares to the tens of billions of pounds they will see a further fall. There is no question of taxpayers’ money that you have wasted. You about that. clearly have not grasped the gravity of the situation and the anger, both in this Committee and in Q223 Pete Wishart: Good morning, Mr Pell. I want Scotland, as to what you have done. Have you? to explore some of the Scottish economy issues with Mr Pell: Yes, I have. What I am saying is that we are you. But, first of all, could I say in response to what at the moment at a low ebb—there is no question you said to Mr Devine and Mr McGovern, the sense about that. I am deeply ashamed about the situation of frustration that the public feels that nobody seems we are in. I think I have made that perfectly clear. to be taking the responsibility, particularly on this However, in the last ten years we have built a pension issue. I listened to the testimony and powerful business. It has brought a huge evidence from Lord Myners. It was not him. It contribution to Scotland. We are determined to get certainly is not the Prime Minister. It does not seem that business back up again as a major flag carrier. to be the current board of the Royal Bank of Scotland. Who is responsible for these operational decisions? Who is responsible for Sir Fred Q219 Chairman: Will the Government’s injection of Goodwin’s pension? I still do not know. Do you public money in the Royal Bank of Scotland be know? divided geographically. Is it possible to quantify how Mr Pell: Can I go back: the issue is under much Scotland will get? investigation by Sir Philip Hampton— Mr Pell: The answer is yes, we have tried to. Let us look at it under two diVerent headings. We have Q224 Pete Wishart: With respect, that is not the agreed to increase our mortgage lending in the UK question. Who is responsible for signing oV Sir Fred by £9 billion. That process is well under way and in Goodwin’s pension? Who did it? fact the business we are doing is running at those Mr Pell: Lord Myners said quite clearly, at the end sorts of levels. This week we announced that some of the day the decisions on his pension are made by £1.7 billion would be allocated to Scotland, the board. There is no question about that because although, quite frankly, if £1.9 billion of demand that is the decision. The question is who else was emerges that is fine by me. These things are not involved at what point. Quite frankly, the issues mathematical. I think that is a major contribution to seem to be quite opaque. I must leave that to lawyers the Scottish housing market. We have always found who are looking at it, and, also, the issues about the Scottish housing market does not tend to have what we can then do about it. In some ways I am as the peaks and does not tend to have the troughs, so much frustrated by that as you are, not so much it is a good market in which to lend, even in today’s about the decision but about the fact that every time current depressed times. I open a paper I get three pages on Fred’s pension when I am trying to get 170,000 people back to work and to focus on their customers and to focus on the Q220 Mr Carmichael: Do you think that that has priorities which Mr Walker raised, which is to get been true over the last ten years? this business up and firing again and get it back on Mr Pell: If you compare that with the peaks and the path to being a full public company, and get the troughs you see in the South East or buy-to-let flats taxpayer, in the nicest possible way, oV our account, in Manchester or Birmingham at the moment, the hopefully with a significant profit. Any distraction in Scottish housing market has some characteristics that purpose from my point of view, as someone who which are, from the banking point of view, quite has to run the business, is deeply regrettable. attractive; that is, less peaks, less troughs. It is just a fact. One of our great fortunes in asset quality has Q225 Pete Wishart: I also share that frustration, but been the Scottish market and, strangely enough, I do not think we will get it resolved until we get these London and the South East have stood up quite well questions answered, with all due respect. Let us for us during the various downturns. It may not feel move on to the future and see what is happening in like that, but that is the reality. What you do not the Scottish economy. Lord Myners in the evidence want to be is in buy-to-let developments in that he gave said that Scotland is in a diVerent Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell position from the rest of the UK to weather the worst The fact of life is that the Scottish brand stands up of this recession and the downturn. Is that a view remarkably will outside this country.We have staV in that you share? Indonesia, we have staV in India. They really like Mr Pell: I can only really comment on our position working for something they perceive as a Scottish in Scotland compared to, say, our other business in bank. They cannot quite understand what it is, but the world. We have 18,000 staV in Scotland. The vast it is clearly very diVerent from a sort of pallid, majority of them work for me in one way, shape or transatlantic, international bank which is most of form, and that is primarily our retail business or our our competitors. I think there is a short-term dip insurance business. As I said, they are going to hold here. I do not think Scotland is any worse oV in up better during this recession than our other terms of branding, interestingly, than anyone else. I Y businesses. They are already pretty lean and e cient. think we can get this business back on the track. V They will be less a ected, on average, than our Scotland as an international brand, or global markets business in London or New York. “Scottishness” as an international brand—which is That is just a fact. From our point of view, there will the way I prefer to describe it—is a very powerful be less damage in Scotland. There is no question competitive edge. I am seeing some sceptical looks about that. there. Can I send you the market research on call centres which lists the most preferred accents in the Q226 Pete Wishart: Stephen Hester when he was in world when talking to someone about financial front of the Treasury Select Committee said there services, and the answer is a Scottish accent. I do not was a total workforce of 180,000 people within the know why—sorry—as an Englishman, but the fact RBS group. of life is it works and now Scottishness works in a Mr Pell: Yes. whole series of financial areas. You only have to go and look at places like Hong Kong and Singapore. Q227 Pete Wishart: In that, he said that 500 of them were responsible for some of the appalling decisions that were taken, including the ABN Amro takeover. Q230 Mr Walker: Do you think that the Royal Bank How many of those 500 were based in Scotland? should just become a retail bank going forward? Mr Pell: Zero—sorry, maybe one by accident, but Because that seems to be where it sells. I have been nothing that you would recognise. The people quite hard on you, but it is fair to say that your side concerned, I am going to have to use the word of the bank has performed and is continuing to “businesses” concerned, were largely based in the perform. Would you like to see the Royal Bank of US, in Greenwich. There were inevitably some Scotland get rid of its international corporate businesses in London because global markets finance arm and so on and so forth and focus on business, by definition, means it is global. the knitting? Mr Pell: In my more bilious moments I would agree Q228 Pete Wishart: Would it be fair to typify the with you 100%; however, one has to stand up and Scottish part of the RBS operation as being the more then be slightly rational and say, “This is not 1950 traditional sector of it all. All these madder decisions any more, we are dealing in a major global market.” seem to happen in the City of London, Amsterdam It is interesting I just heard the news about the and New York. Would that be a fair Dunfermline Building Society, for example. The characterisation? reality of life is that narrow banks, those who you Mr Pell: That could be a pejorative geographical could argue just did savings and mortgages, quite distinction which, speaking as a retail banker, I V could probably sign into myself, to be honest. The frankly have been just as a ected in all this as the reality of life is our businesses in Scotland are mostly wider banks. I think the reality of life is that we over- our retail businesses. You can walk past them and expanded in terms of the type of businesses we are you see them on the high street, you may think they doing, and that is for the whole sector. If you had a are good or bad or indiVerent but they are what they dispersion curve around retail banking, that are and they are doing pretty much what they did 200 dispersion curve is clearly going to retract. It had years ago. widened out. Banking will be much more with a ‘B’ but we still need what I used to call the Treasury Q229 Pete Wishart: Do you think the reputation of Department of a bank: foreign exchange, money Scotland as being a major financial sector has markets. Our customers still need access to bond suVered unduly because of the collapse of RBS and markets. As a country, we do not have too many HBOS? What do we do to start recovering the other world-class industries, unless we would like to Scottish financial sector? Do you see the diversity we invent one pretty quick, apart from financial have in the financial sector as being a means to get services. Scotland through this? Where do we go? You want to talk about the future. How do you now, as Vice- Chairman of RBS, get us beyond this with the Q231 Mr Carmichael: Your core position is still that strengths that we have and the challenges that are you expanded too quickly, not that you were involved? operating on a fundamentally unsustainable Mr Pell: I think the Scottish financial sector stands business model. in an exceptionally good position worldwide. As an Mr Pell: If we had run a scenario which said the Englishman I can make these sorts of comments! world’s entire financial markets are going to stop— Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell

Q232 Mr Carmichael: You see why I am asking Q235 David Mundell: I want to talk to the issue of you this? jobs within RBS, including jobs in Scotland. We Mr Pell: Yes. working on a figure that RBS employs 17,700 people, roughly, in Scotland. That is the correct Q233 Mr Carmichael: If you are going to be part of ball park? the future of this banking organisation which we as Mr Pell: Yes. taxpayers are then going to reconstruct, I think it is quite important that we understand your analysis of where things have gone wrong. As I understand it, Q236 David Mundell: There has been suggestion—I you are saying, “It is not that we did things wrong think Mr Hester has already made an but maybe that we did them too quickly or that we announcement—relative to potential job losses. did them perhaps with one or two minor errors of How many job losses in RBS are anticipated within judgment, but we think we can recreate what we Scotland? had before.” Mr Pell: Stephen Hester has not made an Mr Pell: No, I would not wish to recreate what we announcement about job losses. He has made an had before. We were clearly overextended in areas announcement about potential cost reductions over that we did not understand—and by we I mean, a three-year period of about £2.5 billion. He has not quite frankly, most major banks in the world in that. gone through any greater detail on that. A As a successful, driving, aggressive bank, I am afraid significant amount of those cost reductions we were up there with the pack following the hunting obviously relate to issues which have nothing to do horn. That is just life and, therefore, to some extent with headcount. The closure of a lot of those we were aVected the most. Seventy-five per cent of businesses I mentioned, quite frankly takes out a the businesses we have today are absolutely fine. significant amount of cost. They are pretty expensive They also have lots of things wrong with them and to run for obvious reasons—hence I use the term they always will have. Five/ten per cent of the “Grand Prix”. That amounts to a hell of a lot of businesses we have today need some fairly people in one go. The only announcement we have significant engineering. Twenty per cent of the made on headcount so far in the UK—on which we businesses we have we really do not want any more. are in discussion with UNITE and therefore it is a That, if you read the papers and the strategic review matter of public knowledge—is that we are working that was produced at the time of our results on plans at the moment to shed about 2,700 people announcement is roughly what we have done. We in the core business in the UK. We are shedding have created a non-strategic business division into thousands as we speak in the global markets which we have moved nearly £200 billion of assets businesses, but in the core business, which is what and businesses which we do not see as having a big aVects this Committee and aVects Scotland, 2,700, place in the world of the future. The reality of life is, as I have said, that that really only aVects 5,000 to of which I would see some hundreds being in 10,000 of our staV. In terms of the quantum of Scotland. But we have to be quite specific: we need business we do, it is still very much on the margin, to define a job as being redundant. We are a multiple but clearly those are businesses—they are asset site operation. In many cases that means someone intensive businesses, they are casino businesses, they might move to Scotland to fill that job or someone tend to have an American flavour to them—that I might move to England. There are a number of see no future for. options available, so I cannot specify on exactly which site that would be. The rough feel at the moment will be for Scotland several hundred. Q234 Mr McGovern: Mr Pell, you said earlier in response to a question from Mr Devine that you wished to draw a veil over the Sir Fred Goodwin’s Q237 David Mundell: Can you put a bit more pension and in response to Mr Wishart you said that definition of several? If I went into your bank and you are as frustrated as anyone by opening the asked for several hundred pounds, I do not think newspaper to find three pages of coverage about Sir that would be a suYcient definition. What is several? Fred Goodwin’s pension. Surely that is a reflection of the public concern, and you referred to it as a Mr Pell: At the moment if I had to come up with an distraction. Could I ask you to confirm that you exact figure, it would be 260. Is that definitive would say to the public that the subject of Sir Fred enough? Goodwin’s pension is a distraction? Mr Pell: No, sorry, it is a distraction for me, because I share the huge public concern obviously but the Q238 David Mundell: It is definitive. If you have as fact is that is a distraction for me because I want to definitive a figure as that, why— get my 170,00 people reading things that the Royal Mr Pell: It could be 270, it could be 240. It is not 800. Bank is doing every day about putting money into Remember this is a three-year event. The economy is small businesses, about lending in the housing changing almost every day,every time we pick up the market. I do not want them to have to spend the first newspapers. One message Stephen has given all his three pages of every newspaper reading about Fred’s people—and obviously my memories of 1991 and pension and what we are doing positively then come 1993—is we are now in a very fluid situation. Some in on page 4. That is the distraction factor. That decisions we made yesterday are not going to be obviously is not in the interests of the UK taxpayer. relevant in a month’s time and vice-versa. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell

Q239 David Mundell: That answer would indicate required from the Government has allowed us to that you anticipate that the retail banking structure carry on at that sort of level. To give you an example: and, therefore, from our constituency point of view, in 2007 I did not like the way the mortgage market for example, the branch structure of the Royal Bank was going because it appeared to me there was only within Scotland staying as it is. one way this particular boom was heading. We took Mr Pell: Walk into a Royal Bank branch, as I am our market share down from 5% to 1%. We are now sure you do. Have a look around. Do you see lots of doing 19% and we are doing record volumes. From people with nothing to do? If you do, please give me my personal point of view, demand for mortgages is a ring, because I need to do something about it. The at an all-time record, but it is a diVerent type of branches are run with quite small staV. There is not demand. A lot of it is re-mortgaging. People have to much back oYce in there. We took all that work out re-mortgage. Customers from Northern Rock have years ago. They work pretty hard for a relatively to find somewhere to go. For mortgages there is modest amount of money. There is not a lot of fat, demand, but not for first-time buyers. A first-time so that I can come in and with a meat cleaver—and buyer is waiting until he sees that headline, in my in some ways I rather wish I could because it would view, which says “House Prices Have Fallen 20%”. be easier for me. Branch networks are pretty lean At that point there is a wall of money out there and and therefore there is not a lot to go for. The areas at some point there will be a pick-up in demand in are going to be in the global markets business, housing. Peter Ibbetson was referring specifically to Y inevitably in some head o ce functions—because small businesses. Being realistic, no-one wants to you have to start with the back oYce. You have to Y start building a new house, no-one is applying to start with expensive people in head o ce jobs, there build a new factory. There is demand for working is no question about that. A lot of it, to be honest, is capital, there is demand for survival. That is our London and it is going to be London-based, because position as a bank, quite frankly. Demand has that is where the big growth has been in the last changed but we are not seeing the big demand: five years. “Please give me a loan for a new housing block”. Even if you have land, you are sitting back and Q240 David Mundell: To clarify that position on waiting to see, so demand has changed. With large your headquarters, regardless of whether it is companies, however, the bond markets and the swanky or not, there has been a view in Scotland, equity markets have just had an absolutely record partly promulgated probably by RBS, that having quarter. Large companies are drawing down money, headquarter functions within Scotland was a very stocking up their wall cupboards, sitting back positive thing in terms of the wider Scottish because they think there is going to be a very diYcult economy. What is the anticipation of the six months, and we are in there helping them with continuance of those headquarter functions and the that, and if they cannot access the bond markets we scale of those functions? have spare capital to lend to them. The SME sector Mr Pell: The Royal Bank was founded in at the moment is one where people are seeing the Scotland—I cannot remember how many hundreds least demand. They do not have access to the equity of years ago—and the Royal Bank will still be in markets and at the same time the bank is the only Scotland in several hundred years time. That is our place they can go to. head oYce. That is our spiritual home. The subject is not open to discussion and has never even come up for 30 seconds. Q242 David Mundell: But that does not have any eVect on your employment pattern? You are Q241 David Mundell: One of your colleagues who is retaining the same employment pattern. responsible for small businesses has been involved in Mr Pell: Yes. some briefing of individual MPs, certainly of myself, and one of the issues he raised as a concern was Q243 David Mundell: Whether or not people are demand. His indication was that from the bank’s buying your product. perspective demand was light in terms of people Mr Pell: Yes, because, at the end of the day,probably approaching the bank for loans and mortgages and V such like at this time, because people were not 95% of my sta are dealing with the customers they buying a house or buying a car or investing in a were dealing with last week. Only 5% of them are out business. Clearly that is a wider issue, but if you do there desperately trying to get new business. On that not have any customers or if you have a reduction in 5% we can argue about whether I need 4 or 3%, but customers or your market share or your perception with the 95% I have a 300-year portfolio of business for the public has diminished, is that not going to to manage. One of the first things I did in getting this have an eVect on the number of people you are job was to get Peter Ibbetson back, because Peter employing? went through the last recession with me, where he Mr Pell: We are now out of an economic boom and helped manage the small business sector in NatWest. we are into a downturn. Demand changes shape. He is recession-proof from that point of view: he has The mortgage market is still quite active for those of seen these issues before, and so one of the first things us who are still standing. The reality of life is that a I did was get him back. He is not 21 and he has not huge number of players have disappeared from that worked for a retailer, so he knows what this is about. market. Although volumes are down 40 or 50%, we Please feel free to pick up the phone to him if you are doing records at the moment and the capital we have any particular constituency issues in this sector. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell

Q244 Mr Davidson: Can I come back to the question diYcult to look at what happened last year and say. of jobs, because when we had UNITE before us they However, we tend to have a relatively young mobile were indicating their unhappiness that they did not workforce. That is just a fact of life. Somewhere seem to be being consulted properly by yourselves between 10,000 to 15,000 people leave us almost about the proposals that you had for job losses. Can without fail in almost any economic conditions— you clarify whether or not it is your intention to during a boom even more—so we have plenty of discuss meaningfully with the trades unions involved lubrication in the system, but the reality we come any compulsory redundancies? down to is that sometimes we are looking at quite Mr Pell: First of all, I hope there are going to be very specific jobs in quite specific departments. few compulsory redundancies, but obviously we are totally committed to discussions with unions, with the works councils and the various social operations Q251 Mr Davidson: I understand that, but if you that we have to deal with around the world. have 10,000 to 15,000 lubrication—and that is an interesting word I have never heard before in that context—I would have thought if there is a reduction Q245 Mr Davidson: If you are totally committed, of 260 you should be able to absorb that and it why did UNITE sit in front of us last week when we should be possible. In fact in terms of goodwill, it met them and say that they were unhappy with the would be entirely possible for you to give a lack of consultation? guarantee to UNITE of no compulsory Mr Pell: In that case why do UNITE not get in touch redundancies, would it not? with me and tell me what they are unhappy about? Mr Pell: No, we would not give a guarantee of no It has not been relayed to me. We have a long history compulsory redundancies, because, for example, the of working with trades unions. issue might be in a marketing department where we have specialist skills, and while I might have an V Q246 Mr Davidson: When was the last time you awful lot of spare sta in a branch in Solihull, the met UNITE? fact of life is they do not have the skills to pick up Mr Pell: I would not normally meet UNITE in my that job. There are three layers of this. First, there is current role. That is why I am saying— using the oil in the system, which is a big advantage that we have as a geographically dispersed group with large numbers of people. Second, we obviously Q247 Mr Davidson: If they do not normally meet go first for voluntary severance. We have already them, how are they going to pick up the phone to you opened the voluntary register. We have a large in particular? That sounds a bit like a body swerve number of people in their fifties who, by and large, to me. are normally happy to step up and take the pressure Mr Pell: UNITE know the HR Director to the oV their colleagues. And the last, but the last option, group, Neil Roden—they probably see him at least is compulsory redundancy. I cannot honestly every couple of weeks—and Neil sits in a room with remember when I last did one. me every day. If UNITE were, in the nicest possible way, looking for something for Neil, then Neil is clearly negligent in not raising it with me. Q252 Mr Davidson: People in their fifties will not be getting pensions as if they have worked to sixty, will they? These people will not get Fred Goodwin type Q248 Mr Davidson: Clearly this mechanism has not departure settlements. been working adequately if they have been sitting in Mr Pell: To be absolutely specific, under the terms of front of us telling us that they are not happy about our pension scheme, if you leave as a good leaver— the level and quality of consultation that there has which this person in the marketing department been up to now. would—then you would get contractually an early Mr Pell: They have not normally been slow in pension. That is a substantial part of our severance coming forward and telling us that. I am oVering to scheme, which is what makes us a very good pick that one up for you. employer. That is just a fact of our pension scheme.

Q249 Mr Davidson: Fine. We will speak with UNITE in a month and check whether or not they Q253 Mr Davidson: You are saying to us that any V are happy. sta who leave voluntarily in the next period would Mr Pell: Thank you very much. get Sir Fred Goodwin type pensions? Mr Pell: They would not get a Sir Fred Goodwin type “pension”, but they are entitled to the structure Q250 Mr Davidson: On the question of compulsory of a Sir Fred Goodwin type leave. I think the two are redundancy,I am not clear what your level of normal subtly diVerent. If you leave as a good leaver—which V turnover is for sta and whether or not it is possible is that I want you to leave, you are the right person for you to say to us that, except in exceptional to leave and you allow me perhaps to bump someone circumstances, you will say there will be no else—then they are entitled to our pension scheme. compulsory redundancies. Is that possible? Mr Pell: It is not possible for us to give a no compulsory redundancy agreement. No-one ever Q254 Mr Davidson: In terms of going forward, the has, to be honest, in recent history. It is diYcult unions have also expressed a concern to me about because we are not in normal times, so it is a bit oV-shoring and whether or not the bank is Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell considering oV-shoring some of the additional jobs Mr Pell: Fine. Let me see if I can weave my way in the near or medium-term future. Can you clarify through that one. that position for us? Mr Pell: Yes, certainly. We have always had a significant IT operation in India, even before ABN Q260 Mr Davidson: You have weaved your way Amro. With the acquisition of ABN Amro we through everything else. acquired a significant processing operation in India Mr Pell: Absolutely. The easy answer on that one is which handles work from all around the world, but that we do not see ourselves as a low-cost provider, the reality of life is that we are a major international we do not see ourselves as an aggressive sales bank, we do some processing work for other provider. We see ourselves as a sensible, middle- countries and from the UK, so the concept does not ranking player, with sensible pricing and a high quite apply to us generically. However, we do prefer emphasis on service. That is, for example, why most wherever possible to do back oYce work in the Royal Bank phones still get answered in branches. country where we have customers, in the country to That costs me money. The Royal Bank and NatWest which we are contributing tax, because we have an score number one and number two for service interest in that economy. That is good business for quality. We do not get there by running a heavily- us. In the figures that Stephen Hester announced, the driven, adrenalised salesforce. Branch incentives are £2.5 billion, there is very little of what you would call roughly 50:50. They are marked on service, they are oV-shoring, either movement out of the UK or jobs marked on sales, and the two play oV against each to a cheaper cost area. other. There are some individuals who do not like selling, but there are some individuals who like selling. You cannot satisfy all the people all the time Q255 Mr Davidson: So there are no plans in the short but we do try to get people in round pegs and round or medium-term for additional oV-shoring? holes. There are sellers in branches who are sales Mr Pell: We can never exclude any options because orientated, but for most of the staV it is their service we do not know how the economy is going, but in the incentive, which comes from customer response in £2.5 billion— every branch. If you come to management, we then throw in another layer, which is the reaction of the Q256 Mr Davidson: It that a yes or a no? staV to the management of that branch. One of the Mr Pell: No, it cannot be a yes or a no, I am afraid. major issues in driving my incentive is an international score of staV surveys on what they Q257 Mr Davidson: I am asking you quite clearly: think of the management at various layers. So there are there any plans? I understand that you can never are three levels: sales, service, and then there is also say never, but I want to be clear whether or not when the view of our employees of us as managers. We you are sitting in front of us you have plans in your would not get the high service scores we get if we back pocket to oV-shore lots of jobs. were running an adrenalin-driven, testosterone- Mr Pell: The easy answer is no, I have not. driven salesforce. We have occasions where we meet that, but it is dealt with under the bank’s disciplinary processes. To come to how the incentive schemes are Q258 Mr Davidson: Fine. Let us move on. made up: we try as far a possible to ensure a sensible Mr Pell: You know, at that level of specificity and in balance between the incentive schemes. In fact the the figure that Stephen gave the market there is a product we are trying to sell at the moment is V very limited amount of what you would call o - savings. You will probably get complaints shortly shoring, but the fact of life is that we are doing that the staV are being leaned on to try to sell savings processing work for other countries in the UK and V products, because that is what we need at the they regard that as o -shoring. moment. During certain boom years I certainly accept the main demand out there is for loan Q259 Mr Davidson: I want to understand where we products. At the moment the demand out there is for are going forward. The final point I would like to savings and mortgages, and that is what staV are pick up about staV is that quite a number of the staV being incentivised to sell particularly. have expressed unhappiness about the roles they are being asked to play by the bank over the recent period, where the emphasis has all been on selling, Q261 Mr McGovern: I have a couple of points still selling, selling to customers rather than service. We on terms and conditions for employees. On the have heard from other banks that the bonus system subject of pensions, which I think you said was a is all tied in to selling things to customers rather than major benefit and a major attraction, could you to simply providing them with their service needs. confirm whether or not new employees are still Can you clarify the extent to which that was true of allowed to enter? Regarding potential job losses, will yourselves, and whether or not you intend it still to employees be oVered relocation? Will they be asked be true of yourselves, if it was true, and whether or to reapply for new jobs on possibly a lesser salary not, if it was true, it is true that you gave additional scale? If they decline relocation or lesser salary, will bonuses for selling loan products as distinct from they be oVered redundancy? savings products, so that the emphasis was all on Mr Pell: I will try to work my way through. We were driving people into debt and encouraging them to one of the last major organisations in the country to take on debt that they did not have before? close our full final salary scheme. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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Q262 Mr McGovern: So it is closed. toxic debt on the APS scheme, or assuring it, we have Mr Pell: Three or four years ago. given you taxpayers’ money to support you. I say we have done that predominantly to allow you to do a Q263 Mr McGovern: So it is no longer a major number of things: one is to get your bad debt out of attraction. your books and allow you to become solvent Mr Pell: We have replaced it with a normal defined again—although that is probably getting on to the benefits scheme. It is still a very attractive scheme, technicalities. The second is to resume lending, to get but that personally was a moment of some sadness credit flowing, et cetera. Do you see that your for me and it was actually a moment of some sadness number one priority is to balance your books by for Fred because he was very committed to it as a workforce reduction? In other words, we did not bail way or retaining people. We had an excellent you out to start on day one getting rid of some of our retention on our staV through that scheme but the people who you term commercial. We bailed you out reality of life is that it came too expensive. We closed to get your functions going first. it within the last few years, which is way longer than Mr Pell: I would agree with that entirely. You bailed most other people managed to hang in. To come us out—and I am happy to use that pejorative word down to the diYcult issue: at the end of the day, in because it happens to be true—but you bailed us out most locations where we have a large location and because we are a major systemic contribution to the we have a redundancy programme, everything else UK economy. We are 40% of the payment volumes. being equal we can normally manage it within the If we literally cease to do business, credit cards of same location. Where we have very specialist issues, 50% of this country become unusable for such time such as a marketing job in Scotland or a marketing as someone puts the plug back in somewhere else. job in London, the reality of life is there is only one We came under the heading, regrettably,of too big to job: you either go to Scotland or you come to fail, and I think that is one of the issues that comes London if you want the job. That is a minority issue out of the Turner Report. You bailed us out in order and we try to stay well away from it. I personally that we could lubricate the economy—again I am have been quite immobile during most of my career using the “lubrication” word, but it is true—to help for family reasons, so I quite respect people’s desire, inject new lending into the economy to help take us if possible, to make a sensible life for themselves in out the other side of this severe economic correction. the location of their choice. I think the way the British Government has handled this issue—and we can have discussions: each V Q264 Mr McGovern: The third question I asked you country has handled it in a subtly di erent way—but was whether people would be expected to reapply for as a bank we now have one of the strongest capital new positions on a lesser salary scale? ratios in the world through the Asset Protection Mr Pell: I cannot think why they possibly would be. Scheme. We actually have, at least for the moment, But if you do come across one, please let me know. I one of the schemes which seems to have acquired the am trying to think on what possible basis we would highest credibility of those in the world, but from a ask people to do that. There is just the odd occasion bank’s point of view I regard ourselves with our where people are told that their job has been majority shareholding being in an exceptionally downgraded, but they are welcome to keep it but on strong competitive position. I have corporate their current terms and conditions. treasurers now coming to me, as compared with, say, Deutsche or Bank of America. I am one of the few Q265 Mr McGovern: So there would be people who can sensibly lend to them as UK preservation. corporates and put that money back into the Mr Pell: Yes. We do what we call red circling; in economy. We are eternally grateful for that support. other words, there is a job but the job has now come down in the hierarchy. We are happy for you to stay Q269 Ben Wallace: In a year’s time, if any in it, but eVectively you are red-circled, so that you redundancies that happen are in the commercial, may lose the trip to the annual General Managers’ retail and the other arm, would you not be quite Conference or something like that, but the fact of life right to be disappointed that what you did was use is that you can carry on on your main terms and some of that money and you just laid oV people in conditions. parts of the bank that were doing quite well? Mr Pell: Yes. Let us try to be realistic though. When Q266 Ben Wallace: On the job loss issue, you do not I say “quite well”, I mean relatively well. The retail have any plans over the next few days or weeks to bank is not going to enjoy the next couple of years. make an announcement on jobs? Even if it had not got over— Mr Pell: Not that anyone has told me about. Q270 Ben Wallace: Will it remain profitable? Q267 Ben Wallace: So that is a no? Mr Pell: I would say that I think it is quite unlikely Mr Pell: No. that many UK banks will make much of a profit next year, full stop. That is not a surprise, because I Q268 Ben Wallace: You talked earlier about the remember being a very senior executive in Lloyds proportion of your debt that was ABN Amro and I Bank in 1991 and 1992 and not making any money talked about the brunt being worked on retail and there either. During the economic downturn, banks commercial and some of that workforce being done. do not make much money. This is a fact. It is We as a taxpayer eVectively bought some of your something we always have endless discussions with Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell the regulators on, because they can never believe giving you the money was about lending to small that our outrageously high profits during the boom businesses. I am getting reports from my are all to do with the bust period, if that is the right constituency and from others that you are not doing way of putting it, in the bank cycle. This has been a that. Last but not least, if a company came to you very long up cycle. Regrettably, therefore, I think it with the profile of your company last October, would is going to have a pretty steep eVect on bank profits you lend it money? over the next 18 months. Mr Pell: With the support of the British Government and the Asset Protection Scheme, I Q271 Mr Walker: Why do all economic booms end would say I was the safest business in the world to in a banking crisis? You have been in this business lend money to at the moment. I go back to this issue: for 30 years. Why could you not ensure that this for one reason or another we are now in the strongest economic boom did not end in a banking crisis? competitive position to help the UK economy come Mr Pell: The unfortunate fact of life is that the banks up the other side. I know there are a lot of corporate are the absolute essential medium between the treasurers who are very grateful for the fact that they generation of economic policy and fiscal policy and can now talk to us, because, quite frankly, nine where it hits the road and the high street. It would be months ago we would have had to say, “We have no nice to think that we could manage the economies lending capacity. We are struggling. Every asset we ourselves, but we tend to play to the tune that comes take oV the book before we give you one.” I have from governments and from regulators. Some of us dealt with the last question first but I will try to work do it better than others, but at the end of the day we my way back up the cycle. I started as a clerk on are the reflection of, in this case, a ten year . . . There £1,000 a year. I have worked my way up to well on is very good analysis in the Turner Report of the £900,000 a year. To that member in your macro-economic factors and how it has aVected constituency—we are an equal opportunities virtually every economy and every bank. Banks are employer—I would say “Go for it.” This is an open where money hits the road. I am sorry,but there is no industry. There is nothing to stop them coming up other way it works. Banks are not retailers. We are that ladder if they want to. Regrettably I expect they not selling bananas. I think at the peak of the boom probably will not earn that salary in the future, people tend to forget this and start treating us just because by the time respective controls have come in like any other shop. We are quite fundamental to the we will be looking at a slightly bigger base. I am UK economy. We need to be regulated in a diVerent afraid I did not arrive with a silver spoon; I worked and far more thoughtful way, I think, than just any my way up the system. I have people in other electricity supplier. countries working for me who earn more than me, Mr Walker: We cannot have a crisis like this again in just to put it in perspective. It is a fact of life that we another ten years, though, can we? are an international business, we need to be outward facing. If we start going internal and start treating Q272 Chairman: Under a Tory Government we will! the Royal Bank of Scotland like a government Mr Pell: I hate to say, but regrettably, I think one of department that will have some advantages. The one the problems with this particular downturn is that it thing it will not do eventually is get back to a has been too long since the last one. The normal significant amount of tax take coming out of this economic cycle has been five to seven years. For all business. I can absolutely guarantee you. That has sorts of reasons, particularly the trade surpluses dealt with one. The small business question: during coming in from China, this particular cycle has been a recession it is a fact of life that businesses—and we ten to 15 years and, by definition, if you believe in the are a business just like any other and we have had theory of long-run averages, it is quite a steep decline our own recession in the last couple of months—are to the long-run average. Personally I would have going to find it diYcult to survive. If there are preferred a minor correction, somewhere around individual instances, please bring them to my 2002, which it looked like we were getting with attention. I do look at all complaints which come in Enron in the States—a massive reaction by the US via MPs because I want to test whether my authorities jerked the economies back up on that businesses are being too defensive in how they deal curve again. In retrospect a little bit more pain then with them. They are asked to do that with anything might not have been a bad idea internationally I that relates to “You’ve increased my interest rate” or cannot comment within the UK. “You’ve withdrawn my facility.” We get about 20 a Chairman: Can we move on now to executive month out of 1.3 million customers that come far payments, bonuses and such like? enough up the system and therefore are serious enough to end up in a letter to head oYce, and Q273 Mr Devine: You earn nearly £1 million a year. everyone is encouraged by Martin Lewis to write to I have constituents of mine who earn £15,000 or head oYces, are they not, so it is not as if people are £16,000. First of all, do you not think that disparity slow in coming forward these days? As a bank, we is obscene? Second, we were told by UNITE that are determined to support the small business sector. there has not been an across-the-board pay rise for Immediately after the October recapitalisation we staV for ten years but what you do is update the came out with our overdraft guarantee that we bonus system, but that is at the discretion of senior would not increase anyone’s overdraft rates for 12 managers and the targets that Ian was talking about months unless there was a serious credit issue. I have earlier on. Is that the case? How much have you asked for any serious credit issues that result in a saved by not giving staV a bonus? Part of the deal in complaint to be referred to me. As those come up for Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell renewal, 85% of them are being reviewed at precisely Q276 Mr Carmichael: Do you believe that the the same rate. We have tried to deal with that one. lucrative bonus system that the banking executives We also came up with our committed overdraft have enjoyed and still enjoy are responsible for the facility. By and large, when we say 12 months, we reckless decision-making which will have seen your mean 12 months. Unless there is a serious decline in bank go bust? credit history, you have your facility. If there is a Mr Pell: You can come up with the intellectual problem with the bank lending, that is the bank’s argument that it is not and it is a worldwide process. problem, not yours. I and Peter Ibbetson went If you look at the Turner Report, it is just one of through this in 1991–93. I do remember spending those issues. I think human nature is such that if you happy afternoons with Lord, then Eddie, George in oVer me the chance to earn £20,000 or £20 million it the Bank of England with the Small Business is going to aVect my behaviour unless I am an angel. Association and the Small Business Federation In investment banking businesses I find it diYcult to trying to fight our way through this. I really do not believe that bonuses do not have a significant eVect want to go through that again. I would much prefer on behaviour. In the retail banking businesses, if one to interact directly with the customers early in the of my staV has a good year he gets a few thousand process. pounds at the level we are talking about. That I do not think aVects behaviour. I think that is a sensible V Q274 Mr Devine: What about bonuses and no pay reward for e ort. In the investment banking rises? businesses, driven largely from America, very significant amounts of money are paid. That goes Mr Pell: Most of our staV get a pay rise in most years. We do not, however, do an across-the-board back to the days when many of these businesses were allocation because, quite frankly, that is straight out partnerships and they were talking about their own of the 1950s. We look at rewarding those of our staV money. who perform well—and by that I mean customer service, not just sales—well above average. We look at unfortunately those staV who do not perform Q277 Chairman: Then your banks mislead people. I well, and they get no pay rise, but, quite frankly, one have my constituent coming to me saying that he has is looking at managing them out of the bank and £50,000 lying in his deposit account and one of your that is part of the process. It is a meritocratic process representatives went to see him and told him that if which results in a performance rating which is he converted this £50,000 into shares he could make discussed with you every six months. It is umpired 12% rather than 4%. Do you think, morally, that is and you have a right of appeal. Exactly the same right? applies to me. I cannot oVer anything better than Mr Pell: I would like to know that miracle product, that. Bonuses. As you will be well aware in because I would like one myself. Obviously if there discussion with UKFI, we are now probably the is a product like that around— cleanest bank in the world, which from a competitive position is quite diYcult in terms of bonuses. No cash bonuses of any significance were paid in 2008. Q278 Chairman: We are talking about someone who The staV you referred to in our branches operate on was misled to change his money from his deposit a sales and incentive scheme, where they are paid account to buy shares. quarterly or yearly.We do not regard that as a bonus: Mr Pell: There are many reasons people might or these are discretionary bonuses, mostly in head might not want to do that but our incentive schemes oYce, mostly in investment banking businesses. I did in our local salesforces are not going to make you not receive a bonus but I found it quite strange in rich. They are not going to drive you to terribly October when I was told that I was not getting a aberrant behaviour. All sales processes are bonus, because I had no illusions I was anyway. As independently managed. There is a compliance far as I was concerned I was way under budget, why process. We have a sample where we ring up would I possibly be expecting one? That was customers after the event and say, “How did that go? probably the least surprising news I received that This is what you agreed. Do you remember that?” year. Bonuses are paid for performance. We were not There is a whole compliance process that monitors performing. our salesforces. We have not been fined. We have not been disciplined by the FSA in recent history. I am a member of the FSA’s Advisory Panel. I am the only Q275 Mr McGovern: When you say that this applies banker on it and I take that responsibility personally to you, who decides what increase you are or are not very seriously. I do not wish to embarrass myself in going to get? my own house, as they say. Mr Pell: This brings me back to, as I am sure you thought, slightly evasive questions on Sir Fred’s bonus. My remuneration is settled by the Q279 Pete Wishart: You replied to Mr Wallace that remuneration committee of the bank, which is a there were to be no job losses in RBS. Why is the group made up of non executive directors, to which BBC right this minute announced 2,700 job losses? the Chief Executive gives his recommendations. I am Mr Pell: Is that the 2,700 that I referred to earlier? I not involved in that process. It is not even discussed said we have been in discussion with UNITE for with me until after it has been decided. 2,700/2,600. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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David Mundell: I checked the website this morning. Wishart has jumped on a band wagon and thought There was no announcement on it. There was no he could make a gratuitous attack on Scotland’s announcement yesterday.I just put a question to you largest bank and demanding sackings. That asking you if you were preparing to make an summarises the position? announcement today or next week and you said no. Mr Pell: Yes.

Q280 Pete Wishart: It is breaking now. Q288 Mr Carmichael: We saw the Turner proposals Mr Pell: I am sorry— yesterday. I take it that we are accepting that light touch regulation and self-regulation and all the rest Q281 David Mundell: You knew when you came in of it is now part of banking history. today that there was going to be an announcement. Mr Pell: Obviously there are a lot of dense Mr Pell: No, I did not know today that there was recommendations there. I think the interesting thing going to be an announcement on anything. I am as is that about 25 out of 30 of them require significant surprised as you. international agreement, which I think is a big issue. David Mundell: That is appalling. I have been under FSA regulation for 20 years now. It does not feel like light touch, I can tell you. I think Q282 Chairman: You are the Chief Executive of the the answer is probably it has been more wrong bank and you do not know there is going to be an touch; in other words, there has been huge emphasis announcement made? Especially when you are on certain parts of our business which are important coming to give evidence to the Committee. but a disproportionate lack of interest in issues such Mr Pell: No, sir. as liquidity, capital. It was assumed banks sort of David Mundell: It was a direct question from Mr had a life of their own and could survive almost Wallace. regardless. While issues such as conduct of business in branches such as the Chairman was referring to have received huge, rightful but probably Q283 Pete Wishart: Are you aware of statement disproportionate attention, and I think Hector coming today or in the next few days on job losses? Sants, the Chief Executive of the FSA has obviously Mr Pell: The answer is no, I was not. The answer is picked that up. absolutely true and if it is true of course that I am not going to be best pleased when I get back. Pete Wishart: You are the Chief Executive. Q289 David Mundell: For our records it is important Chairman: Who makes the decisions. to note that the previous remarks, Mr Pell, referred to your evidence to this Committee. That is what the Q284 Ben Wallace: I would fire them when you get BBC are reporting. back. It has made you look a bit of an idiot. Mr Pell: I am impressed. Mr Pell: I think— Q290 David Mundell: It is not a separate Q285 Ben Wallace: The Chief Executive of the bank, announcement. turns up here, has no idea about an announcement Mr Pell: Thank you. I will barbecue myself when I that aVects 2,700 jobs. I would fire them. That is how get back. There are plenty of people in the queue you run some businesses. I find it extraordinary. waiting to have that privilege before I get to it! Mr Pell: If it is true. I have just been handed a note, and it seems like somebody has just been saved from Q291 Mr Carmichael: Back to regulation, if you being barbecued when I get back to the oYce. The would not mind. The Turner Report suggested a cap BBC have picked up the figure I referred to on mortgage lending, for example, back to three previously that we have been in discussion with times single lending. Is that feasible, do you think? UNITE for some time and that figure is now out in the market. Mr Pell: It is an interesting issue. This used to be Ben Wallace: So it is a report from this Committee. called qualitative lending controls and used to exist back in the 1970s. It existed by what was politely called “the Governor’s eyebrow”. The Bank of Q286 Mr Davidson: It must be true then! England would ring you up and say, “We gather you Mr Pell: Have they picked it up from this chaps are getting a little too aggressive in the Committee? I do not know. The answer is that we mortgage market, do something about it.” That is have not made any announcement but it is exactly defined as lending certain times income. It was never the figure I gave you earlier, the 2,700. The good set out in writing. I have just come back from news is there is someone in RBS today who lives to Singapore and you may have views one way or the fight again tomorrow, because they would not have other about the Singapore Government but the fact Y been if I had got back to the o ce, I can absolutely of life there is, for example, that banks cannot lend assure you—and I think the penalties you had in more than 80% of a property value. You cannot lend mind were quite modest to the ones I had in mind. more than x times income. Interestingly enough, you cannot give a credit card to anyone who has lower Q287 David Mundell: In fact what has happened is than the average wage. As a retail banker, quite that following your response to the point I raised frankly, if you tell me those are the rules on the pitch, with you, the BBC have picked that up and Mr I will work them and I will manage them. If you Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell define the pitch for me, I will operate on it. I think But handing people loaded guns because it somehow there is a lot of sense, quite frankly, in qualitative generates the economy gets us right back up the path controls of that sort. Bank products, at the end of the we have been. I do not think that is in your interests, day, are money in one form or another quite frankly. my interests, or your constituents’ interests. There is nothing terribly sophisticated about them. When banks compete, for example, suddenly we get great pledges to be the consumer champion. It tends Q296 Chairman: In February the Royal Bank of to be that they are competing on price, which means Scotland announced they were going to make 2,300 they are pricing the product way below an economic job losses. You are telling us that there are no further rate, and eventually it is going to come back and bite job losses from today? them, or they are pricing on asset quality. They are Mr Pell: There is no announcement, as far as I am lending more to people who probably cannot aVord aware, impending—to take Mr Wallace’s point— it and therefore it is going to come back and bite and, if there is, there will be a barbecuing session them. Excess banking competition often, in my view, when I get back. The consultation we have had with rebounds badly. UNITE refers to that package of two thousand and something. We have concluded that discussion and I said probably a few hundred of that will be in Q292 Mr Carmichael: A qualitative restriction of Scotland. I think we have probably now joined up all that sort is going to delay significantly the recovery the dots that go with that. However, we are in an of the housing market. economic downturn, we have a significant cost Mr Pell: I agree. I have described it a bit like challenge to manage over the next few years. It is a stamping on the brake on a stopped car. A lot of the reality of life that we are going to have less people in Turner proposals are excellent when they work their this business. way through, but, quite frankly, we have to get the car going up a hill first, and then we have to make sure we have the brake and then get it settled at the Q297 Mr Carmichael: We are in danger of proper speed. I think the whole issue about this is disappearing up ourselves here. about timing and getting the synchronisation right. Mr Pell: Yes.

Q293 Mr Carmichael: Does this not come to the crux Q298 Mr Carmichael: On future regulation of of the dilemma we all face, which is the sustainability individuals within the industry, is it reasonable, do of the model going forward. If we are going to stick you think, for us to have a code of conduct for with an aVordability set of criteria, for example, we bankers just as we have for doctors, lawyers, are going to end up in this mess again at some stage accounts and whatever else? Do you think there is in the future, are we not? some merit in having a rule that you do not become Mr Pell: Yes. I personally think doing 100% a banker unless you at least have passed a banking mortgages is pretty immoral to most people. In the exam? old fashioned way, the evidence of some savings ability to produce a deposit, to pay a mortgage and Mr Pell: There is something already called the Code then to cover the repayments is not a bad banking of Banking Practice, as you are probably aware, model. which sets out the rules of conduct by which we have to operate. The concept of some sort of professional qualification, which I think you are probably talking Q294 Mr Carmichael: Can I pick you up on that about, I would certainly support. I am an Associate piece of spin. of the Institute of Bankers by examination from Mr Pell: Yes. about 1976 and a Fellow of both Institutes. Those sorts of examinations have faded away over time Q295 Mr Carmichael: There will be people who because more of our business is moving into think it comes pretty ill to hear you describing investment banking where they do not apply. It somebody getting 100% mortgage, perhaps for the applies in certain of our business and it does not in purchase of a one or two bedroom flat, as immoral others. compared to some of the things that your bank has done in the last six to 12 months. Mr Pell: I agree entirely with you. I was commenting Q299 Mr Davidson: To follow up on the analogy you on the fact that I think, personally, and I think also used with Mr Carmichael about the mortgage corporately, that if you are going to give someone a lending and the loaded gun. Where somebody has a mortgage, everything else being equal, you should be change of circumstance and they have a mortgage, looking at their ability to repay. There is no divine you are then the people who pull the trigger because right to a mortgage, and debt in the wrong hands is you are the people who then have the decision about a loaded gun. It is immoral for us to put loaded guns whether or not to repossess or to do similar things. in the hands of people who cannot deal with it. We I am certainly getting reports from my constituency have a responsibility to make sure—and one of the about yourselves not being as helpful as you might in good ways of doing that is to make sure they have a whole number of circumstances where people have shown some savings ability—that they can repay the perhaps lost their jobs and so on and so forth. If mortgage. If the answer to that is 100%, that is fine unemployment increases, as would appear likely, by me. But personally I would not want to lend 100% more and more people are going to fall into these to the bank. That is my banker half of me speaking. circumstances. Do you still intend to be as Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Gordon Pell bloodthirsty as you have been up to now? Or are you unemployment, marital break-up, illness. Then you going to be more understanding now that you are a have to go in sensibly, jointly with the person, with majority government-owned organisation? the Citizens Advice Bureau, with our own “money Mr Pell: In the first place, you do not give them a sense advisers” in branches, to try to find a way out loaded gun in the first place. Our mortgage book is of this incredibly diYcult situation. You will get one of the most conservative in the country and if situations where, I am afraid, there is just no easy you have particular instances, please bring them to way the person is going to move out into rented my attention and I will look at them. Customers with accommodation or into the Government schemes. us who have mortgages over 100% loan to value at At that point, we have taken a substantial loss. There the moment is in low single digits. is no upside in any of this for me.

Q300 Mr Davidson: The loaded gun was your analogy. I would expand it not just to those who Q302 Mr Davidson: Coming back to the question of have enormous mortgages but those who have your treatment of your customers, the overdraft perhaps been quite prudent but find economic charges and the OYce of Fair Trading inquiry, you circumstances have changed because of job loss or are taking legal action at every stage that you what-have-you. It is then a question of whether or possibly can along with some other banks to try to not you feel an obligation to pull the trigger. stop the OFT making a judgment on the fairness or Mr Pell: We not only feel an obligation, it is in our otherwise of your overdraft charges. Given that you interests to try to find a way with a customer to see are now majority owned by the Government, are you our way through the situation. The answer is easy. reconsidering your position? Or have you come The one way we are absolutely going to lose money under any pressure to do so? is selling the house as a repossession. I can absolutely Mr Pell: No. Could I for the record correct the guarantee you that. If there is any way we can get opening point of your statement? The OFT opened there through shared equity, through housing the box by way of a press release two and a half years associations, to find a way of getting some sort of ago when they announced that in their view they payment to cover that property it is totally in our considered overdraft charges to be illegal and unfair. commercial interests to do so. We were the first bank When challenged by the banking industry, not by us in the country, long before we had this significant as a bank, on what basis they justified it, they government shareholding, to bring in a rule which admitted actually that this was not within their said that we would not repossess a house until at “gift” to make this judgment. It was certainly a view least six months after we had passed the point of they held, but the only way it could be tested would making formal demand, to try to explore every be in court. This left the banking industry in an option that we could possibly get. Going back to my almost impossible position because the box had been own situation, at the end of the day I can only speak for my own bank, we have a very conservative view opened and yet the main regulator was then not on housing. I always have, because I have seen this really in a position to close it. In discussion with the in 1991–92 and I did not want to get involved again. OFT and all the regulators and the Treasury, it was We lend conservatively and we recover slowly. Quite agreed that the only way we could really resolve this frankly, that is the best way you can manage the issue was to get it taken to court and get legal profitability. We want to keep people in houses, we certainty.The OFT was invited by the banks to bring want to keep them making some sort of contribution a legal action against the banks in order that we towards our costs. It is a business rationale. could get clarity on this. That is the legal action which is going on at the moment. The OFT in the meantime has perfect right to come up with a ruling Q301 Mr Davidson: Can you give us some figures— on fairness. It has been two and a half years, no and if you do not have them oV the top of your head, ruling has emerged. That sits entirely within their in writing—about the number of repossessions you gift. have had for the last period? Maybe at some point in the future we will then write to you again and see whether or not that has changed. Mr Pell: Okay. Could I first of all oVer you the Q303 Mr Davidson: The briefing that we have here detailed information in writing but I can give you suggests that the banks are still fighting for the OFT some rough numbers. Roughly, we repossessed a not to be able to consider the fairness of overdraft year ago probably 100 houses a month. These days charges. Is that wrong? we are probably repossessing 120 a month. We have Mr Pell: The situation is the OFT is bringing a case not been experiencing the sort of huge growth in against the banks to prove the charges are unfair. repossessions you have seen reported in the papers That case is continuing. and reported with many of our competitors. The reason is that we do not believe giving people the loaded gun in the first place. I am sorry, we come Q304 Mr Davidson: You are fighting that. You are back to the fundamental lending decision, which is saying that your charges are fair. that you have to lend to people, everything else being Mr Pell: The only way we can get legal certainty on equal, who can aVord it and loan them a sensible this is to get a judge at the end of the day—and by amount of money.Then, I am afraid, you have traYc definition to get to a judge you have to have two accidents, where it all goes down to events after: parties. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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Q305 Mr Davidson: So you are doing this as a public Q309 Chairman: It makes a big diVerence for your service, are you? customers. Mr Pell: No. We are doing it to try to get legal Mr Pell: I am afraid we come back to the issue of certainty on an extremely diYcult legal issue. It was opening up a legal box if we are not careful; the credit started by a press release. card issue was a separate issue which related to one fee. This is actually a whole issue about how you want to pay for the money transmission service in Q306 Mr Davidson: But you have already lost and this country. The word banks are a utility is often you are now appealing, have you not? used and people seem to assume that is some sort of Mr Pell: No. This is a very complex issue. We are in panacea, but when you go home and you use your stage one. Stage one is trying to define. The OFT gas cooker you pay for that gas the moment you turn originally came in with two accusations: one that the key. When you switch on your lights you pay for these charges were a penalty and the second that they the electricity. If the bank is a utility every time you were unfair under various regulations. In the first use your ATM card, you write a cheque, you receive stage of this, basically the issue of a penalty has now your pension payment, we open a basic bank been knocked out by the judges, and therefore the account for someone who is just coming oV the main case will be heard on the ground of unfairness street, there is no charge for any of that and under the regulations. The banks have already somehow those costs have to be recovered. In this halved the size of the pitch, eVectively, on which we country we recover them in this way. I do not now have to fight the main law case. personally find it terribly acceptable but it is the way the industry has evolved and we have to try to find a Q307 Chairman: Mr Pell, the British Bankers way out of this and we are doing that through the Association defended this action by claiming that legal action and we are doing that through every time a customer exceeds their limit someone discussions with the OFT and actually I am quite has to go and look at their account and that cost up hopeful that we will be able to get to a resolution to £39. Do you really believe that if somebody sooner than we all might hope. exceeds their limit by £25 or £30 he should be charged £39 just because they have to write a letter? Q310 Mr Carmichael: On the one hand you start by Do you think this is morally right? telling us that you are not a business like any other Mr Pell: It is horrible to say but morals do not come and then when it comes to this point you tell us that into it, but I think the issue is: is this fair or is it not any other business would do this. and is it fair under a number of diVerent headings of Mr Pell: Any other business, I think most of your fairness? Here I have to take it straight on the chin, constituents would charge me for that ATM in the Harriet Harman court of public opinion transaction and that cheque otherwise they would argument of what is fair, it is unfair. There is no not be able to run their shop—that is just a fact of question about that. You are never going to be able life. When I was saying we are not a business like any to convince anyone, but the reality of life is that on other, the role of banks in society cannot be treated, the same day on which that overdraft occurred, that unfortunately, like a shop; that is why we have to be customer received their pension, paid three much more highly regulated; that is why there are payments, used an ATM—about nine transactions some things that we cannot do regardless of whether took place on their account—and all of those we might think we could make a quick buck out of it. transactions were free. The argument is not about whether that transaction cost £39 or £3 but the aggregate service provided by the banks for that Q311 Lindsay Roy: Mr Pell, in your introductory service is recouped in this country via that charge remarks you highlighted that underpinning the and that is a fair way of doing it. In most countries— bank’s work was an ethical and responsible and it is in the majority in the world—you would approach and you spoke about fairness earlier. You have paid for that pension payment, those two also spoke about the focus on customer needs and cheques, that ATM transaction. I am afraid that you recognised the huge government investment to most countries in the world have gone down that sustain viability of the banks. You have also said route. The UK, and the US interestingly enough, that it is unlikely you are going to make money this have gone down this other route. Personally,I do not year. How do you account for the plethora of find it very satisfactory, but it is where we are. responses from our constituents about unreasonable fees and charges on borrowing well above base rates? Mr Pell: At the end of the day no one likes paying Q308 Chairman: You will be aware that the UK banks—I am afraid that is just a fact of life. credit card industry will entirely reduce their default Obviously if you have specific complaints from charges following the OFT inquiry into the fairness specific constituents please pass them to us and we of charges. Why do the banks not reduce their will deal with them. The vast majority of services charges, particularly in these tough economic times provided in this country from a bank, I would where even a few of your charges represent the best honestly say 90% of those services are totally free. It part of a worker’s weekly salary? is just a fact of life. While most of you have been Mr Pell: The credit card issue was a totally diVerent sitting in this room you have probably used your issue; it related to one fee for a relatively limited bank account four or five times but you do not service. realise it. 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19 March 2009 Mr Gordon Pell have been paid; on the way out you may use the of the deposits required. Would not them being able ATM—all of those services are free. I am afraid there to secure a mortgage free up some of the demand are one or two things we do charge for. that would be required to get us going again in the housing market; and what is the advice to young Q312 Lindsay Roy: We are not talking here about a people who desperately require to get on to the handful of complaints; if we look at constituents housing market, who are then having an impact all across the country there are many. the way up the chain slowing the whole thing down? Mr Pell: Yes. Those complaints relate to a rather So this whole idea of a fiscal stimulus in terms of the limited number of areas since 90% of what I do is housing market is totally being overlooked and not for free. being delivered. Are 100% mortgages or high mortgages such as that as bad as everybody is Q313 Mr Walker: Mr Pell, they are not because you making out? know full well that on most current accounts you do Mr Pell: Let us wind back slightly. The problem we not pay interest rates and actually on those accounts have at the moment, whichever way you look at it on which you do pay interest it is absolutely there is far too much debt in the world economy. At marginal. So, for example, when interest rates were one level that is 100% mortgages, at another level it at 5% people’s chequing and current accounts were is government deficit and at another level it is perhaps earning 0.01%, 0.02%, so it is a bit someone like us who has overextended. That debt disingenuous to say that you were providing these has to come out of the system to allow the UK and services for free because what you were doing was world economy to go forward again. Withdrawing lending their money out at profit while it was that debt and at the same time getting the economies Y Y retained in your bank. going is a di cult issue for economies, it is a di cult Mr Pell: It would be nice if I could devise a model issue for first time buyers. I still come back to the fact that is actually like that. There is virtually no that at the end of the day you have to rebase the country in the world—in fact I have not found one thing. For most of history a 90%, 95% mortgage has yet—that pays what I would loosely call sensible made eminent sense; 100% mortgages, in my view, interest rates on a current account; there is a clear are bad banking because there is no actual cover. If separation between savings accounts and current someone comes to me and they have a large income accounts in every economy in the world. Where and they have managed to save and they want to people have tried to pay real interest rates, if that is borrow 100% and it still shows that they have V the right way of putting it, it has tended to be a massive a ordability but they just want 100% then relatively short term marketing gimmick. that is fine by me; but unfortunately it tends to come together with the fact that they have not managed to save, they are really stretching their income and they Q314 Mr Walker: But you are not doing it for free want to borrow 100%. You could argue that they are because if you were doing it for free you would not operating like an economy that is borrowing too have made the enormous profits you have been much. making over the last decade. Mr Pell: No because actually most of the profits we have made over the last decade are not made out of Q317 Mr Wallace: Like our economy! running the current account product; it is the Mr Pell: I could not possibly comment. infrastructure on which so much else is built. We make profits out of savings, we make profits out of mortgages and we make profits out of loans. The Q318 Mr Wallace: You can comment. current account product, I am afraid the Mr Pell: The world economy—I have read the infrastructure, the utility is relatively unprofitable Turner Report. and the typical current account has £1200 on it. Q319 Mr Wallace: Unprecedented global economy. Q315 Mr Walker: But it is only a small part of the Mr Pell: The unprecedented global economy has far overall package; most of your clients you upsell to, too much debt in it and the debt has to come out. The so your clients with current accounts will have problem is down at the ground roots, that is the mortgages, will have savings, will have all sorts of house buyer trying to find a 100% mortgage. other accounts, so the service you are providing is Unfortunately we have to take one step back in not really free, it is part of the overall package. order to move three steps forward. A 95% mortgage Mr Pell: But that is why the complexity of the issue on a relatively modest property in my view is still with the OFT. doable.

Q316 Pete Wishart: Just to come back to 100% Q320 Pete Wishart: Are these products still mortgages because they have emerged as the bogey available then? product of the downturn, with the Prime Minister Mr Pell: I will lend up to 90% at the moment. almost going as far as to blame the 100% mortgage for a big part of this downturn, and I noted your comment about the “loaded gun” in your exchange Q321 Mr Walker: How can you lend 90% of a with Mr Davidson. I get so many constituents now property’s value in a falling property market because in their 20s and 30s who find it almost impossible to you could lend 90% today and then actually within get into the housing market now because of the size six months the property would be worth less than the Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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90% you lent on it? Surely that is still fairly reckless, directly impacting on the small businesses at the particularly at 95% as you suggested you would also other end. How are you going to avoid that? Is that look at. not incredibly unfair to some of your clients? Mr Pell: The vast majority of our mortgages are Mr Pell: No. The reason of course that we have actually done at about 65% to 75% loan to value. I received such strong support from the UK still have a product available on the High Street for Government is that we impact on the UK economy someone who can come and demonstrate to me that in almost any way that you care to touch. Last time they can actually aVord it, up to 90%. This is the I worked out that probably about 30 million people diYcult conundrum of trying to manage the fact that in the country touch us somewhere or the other even as a banker— if we do not have a bank account with them; so we are totally systemic from that point of view. The answer is Chinese walls; those people who advise Q322 Mr Walker: Risk. large companies operate in one block. There is no Mr Pell: . . . I would prefer to lend 60%. As a conflict between these two activities. I quite contributor towards the UK economy and to try to appreciate that there is a knock-on eVect from help that first time buyer I want a product out there decisions made in one part of the bank but at the end for people who can aVord to repay; and this is where of the day it is a decision being made by B&Q. We we come to the crucial issue—I am not lending for are there as their corporate finance adviser; we are the house I am lending for the individual their not there making decisions for them, it is a service we income. sell. To be honest, I do not think we are really advising at that level of micro detail, quite frankly; we are advising them on raising equity or deciding Q323 Chairman: You say that you are lending people that they have to go into administration. It is at that on income but my information is that that is one of level rather than how they manage their debtor the main reasons why the banks and financial invoices, quite frankly. So it is an issue; but, again, institutions went down the tube is that they asked going back slightly, the more we can put money into people to self-certify their income, and now when the the top end of the market the more it will flow renewal is coming they are asking them, “Can you through to the SME because they will not see the bring proper proof that you are earning this much?” invoice chain. Every pound we put into the SME and the people who are even making their payments sector or the large corporate should get a three times regularly are now being denied their mortgages. replicator through the system and that is, I am sure, Mr Pell: I agree with you. We withdrew from self- part of the reason that so much government money certified mortgages in 2005 because I thought the has been put into us. I hate to say that we are good market there was unsustainable and actually it was Y value but the reality of life is that putting bank di cult for me to manage a sensible asset quality on money into a system has an acceleration eVect the basis of what appeared to be a piece of paper through so many sectors; it is actually a very good coming through the post saying that people could way of reactivating the economy. aVord something, with no evidence. Eventually I did not feel that I wished to get involved in that market and I have stayed out of it. Q325 Mr Devine: Recognising the mess that you as bankers have made of the institutions and recognising that we own 70% of the shares, should Q324 Mr Wallace: In the future we clearly have a we not be putting people on the board? problem with the economy and we need to stimulate Mr Pell: As part of the agreement in October it was demand and obviously businesses both small and big agreed that, apart from getting rid of a number of the will have that demand problem—people not buying existing management team, the board would be their products and whatever—and also the cash flow appointing three new non-executive directors which problem, which is liquidity and those issues which would be done in discussion with UKFI and that you have faced. Let us say that you represent a huge process is going on as we speak. Under UK shop; let us say that one of your clients is the B&Q corporate governance, however, those directors chain—I do not know if it is and I do not expect you represent the interests of all the shareholders but to tell me whether it is—and they have a cash flow since, quite frankly, you own 70% of the shares problem and you as the bank say to them, “The best anyway it becomes a bit circular after a while. The way is to string out your invoices; go from 30 days reality of life is that even though we are a public to 90 days.” It is not acceptable but is a very common company you are by far the largest shareholder and, practice. At the other end of your bank you quite frankly, no serious decision would be made represent lots of little small businesses who are without discussion with you at some level or the dependent on being paid by those businesses within other. That is just the practical reality, whatever the the 30 days as suppliers to B&Q, for example, and corporate governance says. they are going to come to you and say, “We have a Mr Walker: Mr Chairman, this session has overrun liquidity problem, a cash flow problem because we by 45 minutes and I am quite keen to see Lloyds are not getting paid for 90 days” and you the bank HBOS. say, “We can give you an extra overdraft facility but Mr Davidson: Maybe you should not have asked so it will cost you. We can lend you a loan to cover that many questions earlier on. but that will cost you.” So in a sense you are making Chairman: We will finish at about 11, in three money from both ends and your advice at one end is minutes. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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Q326 Mr Davidson: I have a point about business then, quite frankly, so has the diVerence between lending. I get quite a number of small businesses in Libor and base rate. The reality of life is that the base my area complaining to me about banks in general rate has come down so much and most of your small not being as supportive as they ought to be, saying business customers probably have a financing cost things like the minimum charges have gone up, which is 50% less than it was 18 months ago; it is just charges have gone up, interest rates are dreadful— a fact because of the reduction in base rates in this that is in terms of the charges that are actually being country. If their income is down 70% that might not levied—no flexibility or taking into consideration help them. individual unique circumstances and so on and so forth. I am sure that my constituency is not unique Q328 Mr Davidson: In terms of volumes— and so can you give us any evidence that in fact you Mr Pell: Volumes are up about 7% year on year but are lending more to small businesses in the present there has been a change in that mix; people are not economic circumstances? Do you have statistics? doing new investment products, that volume is more Mr Pell: Absolutely.3 survival based—it is overdrafts, it is getting through the recession. Q327 Mr Davidson: Do you think that you are being more agreeable to small businesses than some other Q329 Chairman: Can I thank you, Mr Pell, for your banks and that therefore this is not a problem for attendance. Before I declare the meeting closed you, or are you just as bad as the others? would you like to say anything else in conclusion, Mr Pell: I think I am better than the others but then perhaps on the areas which we have not covered I would, would I not? I think you would have to ask during our questioning? them for their position. Our small business lending Mr Pell: Can I just refer back to my opening has grown by about 7% year on year; we are remarks? We are hugely grateful for the support we committed to an extra three billion. We have not have received from the UK Government. We are actually increased our money transmission tariV for extremely—to be honest “ashamed” is a word I have small businesses for over two years. We have to use—ashamed of the anxiety and stress we have committed that we will not increase overdraft caused to both customers and our staV over the last margins for the next 12 months and that again is a 12 months. We are determined to give the matter of public record. What has increased is that government a return on their money and we are the margins have probably gone up about 1% but determined to contribute to the economy very strongly over the next couple of years. Thank you for 3 Ev 128 your time.

Witness: Mr Archie Kane, Group Executive Director, Scotland, Lloyds Banking Group, gave evidence.

Q330 Chairman: Welcome and thank you, Mr Kane, of history in Scotland. Our focus is very much now for appearing before the Committee. I am sorry that about making Lloyds Banking Group a success for we are running late; it took us more time than we customers, for staV and for shareholders in Scotland expected with the first witness. You will appreciate and across the UK. that these are extraordinarily diYcult times and serious times. Would you like to say anything in your opening remarks? Q331 Chairman: Executively how much of Lloyds Banking Group now does the government own? Mr Kane: Yes, if I may, Chairman; thank you very much. The Lloyds Banking Group came into Mr Kane: The government owns 43% of Lloyds Banking Group at this point in time. existence on 19 January 2009 when it acquired HBOS and it now forms Scotland’s largest private sector employer and is a substantial investor right Q332 Chairman: Even the further injection of across the whole of Scotland in all sectors of the money? economy. The Bank of Scotland brand will be the Mr Kane: The Asset Protection Scheme will have to flagship brand in Scotland for personal and for go to the shareholder vote, which will take place at corporate business and it will be highly visible as we some point throughout the year, probably in the go forward into the future. The company has the middle of the year some time. At that point if the largest branch network in Scotland and the largest preference shares are converted by the government it ATM network in Scotland and it intends for that could go up to in excess of 50—some 63%. However, position to be maintained. We also pride ourselves that is not an absolute certainty because depending on the strong Scottish heritage, coming from both upon the price of the shares in the market at the time heritages. We pride ourselves also on the service that of conversion existing shareholders have the right to we provide to remote communities and excluded buy those shares; so it is unclear as to what the groups. The Scottish HQ is at The Mound and the government ownership will be, and as you are Bank of Scotland will continue to print Scottish probably aware at this point in time the strike price banknotes. We are very proud of our Scottish of those shares is lower than the actual price at which heritage and acutely aware of the important role that the shares are trading. So therefore it would be the Bank of Scotland has played over some 300 years reasonable to assume that some of the shareholders Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane would acquire those shares. So it is unclear as to have a tough time to go through and there is no what the final position would be. As we sit here point in trying to duck that issue. But in the today the actual ownership is 43%. medium term we believe that we will come out of this in a very strong shape and it will be very good Q333 Chairman: Will the money injected by the UK for our customers, for our staV and for our Government be divided geographically and how shareholders, but it is going to take some time. much of this will go to Scotland? Mr Kane: I believe you are referring to the Q337 Chairman: Did Lloyds have any of the same additional lending that we have taken as part of management problems as the Scottish banks before this whole arrangement. We have undertaken to do the acquisition? some £14 billion of additional lending and that will Mr Kane: Lloyds has been in the past sometimes be prorated right across the country and it will be in criticised for being too boring, too conservative, a areas such as SME lending, mortgage lending and bit too prudent and actually that has proved to be corporate lending. Remember that this deal was quite a good model for the circumstances that we struck less than two weeks ago and so we have not have seen in recent times and the circumstances we got to the point of allocating chunks of money yet are going through. So the management of Lloyds but it will be proportionate to our businesses in is experienced and operates a very strong risk Scotland. management process. We have very clear risk management disciplines and we have a very clear Q334 Chairman: Can you quantify how much is definition of our risk appetite, i.e. the type of going to be spent in Scotland? business that we will engage in and the type of Mr Kane: I cannot give you a figure on that just business that we will not engage in. So that has now because we do not have a figure, but it will be stood us in good stead and the management team proportionate to the business we do and we do a lot at Lloyds is quite a strong management team, I of business in Scotland; so Scotland will definitely would say. benefit from the additional lending. Q338 Lindsay Roy: To the best of your knowledge Q335 Chairman: Eric Daniels, in his evidence to the were there discussions about possible takeover or Treasury Committee, said that the only reason merger prior to September; and, if so, what was the Lloyds has had to take taxpayers’ money is because perceived complementarily with Lloyds and of the acquisition of HBOS; is this correct? HBOS? Mr Kane: Clearly Lloyds Banking Group has been Mr Kane: There has been what I would call very prudently and conservatively managed and has high level or light discussions over a long period of weathered the global financial crisis better than time—nothing serious. But all institutions look at some other competitors, there is no doubt about each other and that is part and parcel of normal that and I think the figures in fact speak for business in corporate life and banks are no diVerent themselves. The fact of the matter is that by from that. So you look at organisations, be they acquiring HBOS Lloyds Banking Group—Lloyds domestic or foreign; you look at how you fit TSB as was, Lloyds Banking Group now—is in a together; you do analysis and you have your diVerent position. The profile of lending that HBOS advisers doing that type of work. There have been adopted is diVerent from the one that Lloyds TSB discussions from time to time but the issue that was adopted; it has a diVerent risk appetite. Therefore, always in the way in terms of Lloyds TSB and as you will have seen in the Asset Protection HBOS getting together was always to do with the Scheme that we have gone into, a significant competition issues and therefore we did not proportion of the amounts that were put into that progress. came from the HBOS side. Therefore, that has had an impact upon the amount of money that was Q339 Lindsay Roy: How does HBOS seem to be taken. complementary to your business arm? Mr Kane: For example, Bank of Scotland is much Q336 Chairman: If you could reverse the clock do stronger in Scotland than Lloyds TSB was. Their you think you would still take over HBOS? insurance is quite complementary. Apart from Mr Kane: At the time that we took over HBOS we being responsible at board level for Scotland I also believed it was a very good deal and I have to say run our insurance division; they have a very good that even today—and we sit as a board and we ask insurance division. And if you look at their life and ourselves that question because I think it is a very pensions business, for example, they have some relevant question for us to face up to as a board— very good products that we do not have—oVshore we still believe that this was a very good bonds, some very good investment products, those commercial deal. The reason why we think that is types of things. We on the other side have very that we believe that Lloyds Banking Group as it is good pension type products which they did not constituted will be a very strong and robust have; so there are quite a lot of products and business in the medium term. We have to go services that complement rather than duplicate. through a diYcult period; we have a very diYcult set of circumstances, we have a global recession and Q340 Mr Walker: But the reality is that although it impacts everybody in diVerent countries—it you are a board member of Lloyds you were not impacts on the UK and it impacts Scotland, so we involved in the discussions around the takeover, Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane were you? That was Eric Daniels and Victor Blank the competition rules because we would not have and the Treasury and the board of HBOS as was. been able to do it otherwise—that is a matter of fact; You personally were not involved in the and I believe that the important thing back then was negotiations. all about financial stability within the UK and that Mr Kane: The way these things operate is that the was a serious issue at that point. full board has to meet and decide, so as a board member I was fully engaged with all of my other board members in all of the discussions as they took Q344 Pete Wishart: Can I explore with you, Mr place. So we were all informed as to what was Kane, about what exactly is going to be happening happening and in the initial stages you are absolutely in The Mound? You talked again today about HBOS being the brand in Scotland as such, but does right, the discussions tend to take place at Chairman V and Chief Executive level; but then as we have got that mean that e ectively it disappears throughout into putting the deal together we would have met the UK and other international markets or is HBOS with our opposite numbers to do due diligence and solely and exclusively going to be a brand in so on and so forth, so I was actively engaged in that Scotland? type of activity. But in the first and earlier Mr Kane: First of all it will not be HBOS it will be discussions I was not personally involved. Bank of Scotland in Scotland and that is where it will be primarily positioned. We will be using the other brands, Halifax and Lloyds TSB in other Q341 Mr Walker: But you have been at Lloyds Bank geographies. So that is the way we are positioning at for 23 years? the moment. You asked me about The Mound. I Mr Kane: That is correct. operate from The Mound now and I have headquartered the insurance division in The Mound, so we run all of the insurance operations and in the Q342 Mr Walker: If I cut you open there is probably UK we will be probably the biggest insurance a green Lloyds Bank inside your veins, but can you operator within the UK, and a large proportion of really bear to be in the same room now as Eric the employees will be outside of Scotland so that Daniels, given what he has done to your they will be spread around—they will be in conservative bank and given what he has done to Edinburgh, Yorkshire, South Wales, some in the your loyal shareholders? Can you really bear to Home Counties and so on and so forth. So the share a space with him? executive team for insurance will be based in The Mr Kane: The answer is yes, I can. I know Eric Mound. Also, I have created a Scottish Executive Daniels extremely well. He was a colleague on the Committee, which will move right across all of the board with me and then about five and a half years lines of business and we are organising it on the lines ago he became my boss. I know Eric extremely well; of business; so corporate banking, commercial he is probably one of the most experienced bankers banking, SMEs, retail banking, wealth management around in the world; he is an exceedingly and insurance and so on and so forth, all have lines professional and exceedingly principled guy and I of business. So that Scottish Executive Committee think he has done a very, very good job through very will sit in The Mound and in fact it already exists— diYcult times. By the way, I am from the TSB side so I have constituted it and we have already met—and if you cut me open I am not necessarily completely it will look right across all of those lines of business green; I have come through the TSB—that is where and present into the Scottish market as an entirety. I started—and then into Lloyds TSB and now into Lloyds Banking Group. Q345 Pete Wishart: That is all very helpful but the essential question is: the Bank of Scotland will then Q343 Mr Walker: But having escaped the pile up of only exist in Scotland; is that right? Will there be a the banks’ car crash, Lloyds Bank was in a strong UK-wide scale of networks? position and he seemed to turn his car round, the Mr Kane: Primarily it will focus on Scotland. bank round and head straight towards the crash to join in. Do you not feel in hindsight that perhaps Q346 Pete Wishart: But you are not ruling it out? HBOS might have been better oV if it had been Mr Kane: I am not ruling it out and I do not want to nationalised and Lloyds Bank could have retained be point specific because I do not know about that its strength in the market place, in the value of its degree of specifics, I am just not sure. But the focus shares and its capitalisation? will be in Scotland and the focus in England and Mr Kane: First of all, I am a board member so I have Wales will be Lloyds TSB and Halifax will be the to take collegiate responsibility with my fellow mortgage bank. directors and we made a joint decision and we were unanimous; so I cannot step away from that and that part of that board. The issue about whether HBOS Q347 Pete Wishart: Can you describe what other could have been nationalised, it is quite clear that the decision-making functions will be done in The Government did not want to nationalise HBOS and Mound because obviously the headquarters will be that is a decision that they made. The reason why I in London? But what else in terms of executive believe we were able to execute this deal, this making decisions will be made in The Mound? 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19 March 2009 Mr Archie Kane services that would not be there, which is all very the view that they would have to take a provision of helpful and all very welcome, but in terms of us in some £2 billion—additional provision in 2008. We Scotland eVectively using a headquarters in formed the view that that was the incorrect number; Edinburgh what will be happening in terms of we formed the view it was £8 billion. The number executive responsibilities within The Mound? that eventually came out was £9.6 billion, so we got Mr Kane: There are a number of functions in The it wrong by £1.6 billion, and the reason why we Mound; there are some legal executives in The underestimated it by £1.6 billion is because of the Mound; there are some communication executives decline in the economy in Q4 of last year. We were based in The Mound. There are a large number of assuming, along with virtually every other forecaster corporate and commercial banking jobs in in the market, that GDP would go down somewhere Edinburgh spread around, so there is a really big in the region of between 0.2 and 0.4%. It actually presence in Edinburgh. If you know The Mound at went down by about 1.4%. When you have big all it is not that big; it looks a big building but lending books and the GDP goes down and the actually inside it is not that big and its capacity is, I economy goes down that quickly it has a massive think, only about 100 people—I have not actually impact upon the impairment charges that you take, counted the chairs myself. We will fill that building so the impact of that was £1.6 billion. So that is the up quite quickly with senior executives generally story of how the thing built up. who will be operating in Scotland. They will not necessarily just have Scotland; they will have responsibilities elsewhere. Q353 Mr Carmichael: Did it not cause you some concern though that there was such a disparity Q348 David Mundell: A very small point, if I may. between your estimate and the HBOS estimate? HBOS is eVectively dead. We will not now hear the Mr Kane: The plain fact of the matter is that we have expression HBOS in the future, it will just be Bank a very clear view of our risk appetite, how we will V of Scotland. operate, and it is quite well defined in the di erent V Mr Kane: It will be Bank of Scotland and Halifax. sectors in which we operate. HBOS had a di erent view. As we went through diligence—and Q349 David Mundell: HBOS as that entity and as subsequent to that, since we have taken over the that brand existed is now dead. company—we have applied that to their book and we just operate in a diVerent fashion. We have a Mr Kane: The brand you will hear about is Lloyds V V Banking Group, which will own a number of di erent set of credit criteria and we have a di erent set of risk appetite. HBOS had a completely operational brands underneath it and Lloyds TSB V will be one, Halifax will be one, Bank of Scotland di erent set. will be one and Scottish Widows will be another one, so there will be a number of brands operating in Q354 Mr Carmichael: So at the point at which you diVerent fashions. The only entity, the publicly assumed control of HBOS on your own estimate it owned company will not be HBOS—that has gone, was foreseeable that you would end up in the that does not exist any more. position you are in today, whereby you are 43% government owned with the prospect perhaps of Q350 David Mundell: And we will not see HBOS on another 50% of that figure at a later date? our chequebooks? Mr Kane: When we acquired HBOS we had realised Mr Kane: I think over time that is probably correct. by that time that the economy was getting worse in a faster way than we thought originally, so we knew Q351 Mr Carmichael: Can I just finish the process of that that was going to have an impact and that is the unpicking how we got to where we are? As far as the bit that causes most stress and strain. Other than decision to take over or merge with the Bank of that, it was as we originally thought it would be. Scotland as far as HBOS is concerned, did you know the extent of the toxicity of the product that you were taking on when you made that decision? Q355 Mr Carmichael: I am sorry; I do not quite see Mr Kane: We did a considerable amount of due how you get to that point. Was it foreseeable when diligence, some 5,000 days, and in fact we did you took it on that you would end up as 43% everything that we possibly could given the rules and publicly owned? regulations of publicly quoted companies. So we put Mr Kane: Yes; that was decided back in October. in a huge amount of eVort, not only using our own experts but using a raft of appropriate advice. Q356 Mr Carmichael: Was that something that was made clear to your shareholders at the point at Q352 Mr Carmichael: So you made a lot of eVort. which they voted? Did you know the extent of the toxicity of what you Mr Kane: Yes. were taking on? Mr Kane: If I can just explain that? We in discussions with HBOS management formed a view as to the Q357 Mr Carmichael: So they voted in the full state of primarily their lending book and primarily knowledge? some things like corporate and special mortgage Mr Kane: I think the aggregate sum was some £17 type lending. HBOS management at the time—this billion of government funds and that was put to the is prior to the year end, the end of last year—formed shareholders at the time. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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Q358 Mr Carmichael: With the benefit of hindsight facilities in The Mound, that really Scotland has one do you think that the Government did you any bank, the RBS, and it has a brand called the Bank of favours in waiving the Competition Commission Scotland that belongs to a UK based other bank? requirements? Mr Kane: That is not the way we see it. I think that Mr Kane: What I believe to have been in the the important thing is that if you are a customer of Government’s mind was that they were concerned the bank do you have access to competitive banking about financial stability and I think that was products and we are intent to not only maintain our paramount in their mind, and I think that is what led presence in Scotland but to compete very strongly in them to make the decision to waive the normal Scotland. You will have RBS competing; you will competition regulations. That is what I believe they have Bank of Scotland as part of the stronger Lloyds did. If they had not done that we would not have Banking Group competing; you will have been able to take over HBOS and the reason is that Clydesdale competing and you will have other we could not have gone through a protracted players who will come and go into the market place. competition review. We take our Scottish presence very seriously. Both organisations have a big history—remember the TSB has a big history coming from Scotland, and the Q359 Mr Carmichael: So it was good for the Bank of Scotland has a huge history; so we take our Government; was it good for you, did they do you Scottish presence very, very seriously. I personally any favours in that in retrospect? feel quite strongly about it and we intend Scotland Mr Kane: I believe in the medium term that this to be a significant and growing market for us and we takeover will prove to be very sound and very intend to service our customers and look after our successful. We have a diYcult period to go through customers in Scotland. and that is the hard fact of the matter. Q362 Mr Wallace: Mr Kane, I understand that you Q360 Mr Wallace: Following on from that, with the take the brand of the Bank of Scotland very HBOS competition oV OFT clearly there was a lot seriously, but if you look at other banks, let us say of will from the Government and HBOS to find a Coutts within the RBS group that has a separate marriage for HBOS. Lord Mandelson used to be FSA registration, it is a separate bank eVectively of employed by Lord Stevenson, which was an part of the overall group. Will Bank of Scotland have interesting relationship and they came along and a separate FSA registration from Lloyds Halifax courted you. Obviously it had been known about for and where will the head oYce of Lloyds Bank Group some time that Lloyds had a whiV of interest in be? Will you sub-divide Lloyds Bank Group or do acquisition and the barrier had been the OFT and you go into retail banking or commercial banking the competition. Today we have seen BAA being and actually they all report to the same boss within ordered eVectively to sell of some of its share of the that division, so eVectively it is really a brand? market. Have you been given any assurances that Mr Kane: Currently they do have separate FSA while upfront the Government has eVectively registrations. Over a period of time the diVerent dismissed some of the concerns of the OFT, that in businesses within the group—for example, if you five years’ time, ten years’ time the OFT will not be take the life businesses they have separate allowed to come along and say, “We are all back to registration, so that will not change—if you take the profitability, time you split up again?” Have you banking businesses the retail and commercial all been given any assurances like that? come together under the one regulated entity. Mr Kane: No. What has been made clear to us is that the competition authorities will watch very carefully Q363 Mr Wallace: So the Bank of Scotland will lose how we behave in the normal way that they would its FSA registration in time? observe and watch any significant players in the Mr Kane: I believe that to be the case but I am not marketplace. So we will be subjected to regular entirely sure as to how that will operate going review by the competition authorities and we forward. understood that from the outset.

Q364 Mr Wallace: I understand how important it is Q361 Mr Wallace: On the HBOS creation, I have to send a message from the Lloyd Group that the always found it amazing that when the Bank of Bank of Scotland is Scotland’s bank and it is a Scotland was eVectively taken over by Halifax— Scottish brand, but behind the brand it is really just they call it a merger—that was really the end of the going to be another division of Lloyds Bank Group; Bank of Scotland and you had a few dress rehearsal it is not a Bank of Scotland any more, it is just a board meetings at The Mound and a few functions brand of Scotland. and you obviously had things like Scottish Widows Mr Kane: I think I have to be clear. Lloyds TSB took based there but in general the Bank of Scotland was over HBOS so HBOS does not exist any more as a quite dominated by the way HBOS or Halifax ran its separate entity. Those are the facts. These things aVairs. So this is now a takeover of a takeover. Is it happen in all industries with all companies, so really right to say therefore that Scotland now only changes do take place. There will be changes, there has one bank and that is the Royal Bank and that the is no doubt about that, and I do not think we have new Lloyds Bank is merely a branding exercise of the tried to pretend otherwise. We are clearly going to try Bank of Scotland now; apart from a few tea making to operate the place in the most eYcient and Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane practical way that we can, so therefore where it of staV. We will then look to deploy voluntary would make sense to rationalise registrations and redundancy in a targeted fashion in the particular rationalise structures we will do so. areas and we will do everything we possibly can to avoid compulsory redundancy and we have a long Q365 Mr Devine: If the Government was not going track record of behaving in that fashion and we to nationalise HBOS and if you had not taken it intend to continue to operate like that. We have an over, what would have happened to it in your ongoing dialogue with our unions and whenever we analysis? have something of substance to say we will talk to Mr Kane: It is somewhat hypothetical but the unions and to the staV. nevertheless it was quite clear at the time that HBOS was having diYculties in funding; that was a Q369 Mr Davidson: Can I turn to the question of liquidity problem, they had real funding diYculties, branch closures and amalgamations and seek and I think that many people came to the conclusion clarification as to how that is to be handled because that HBOS certainly at that time was really going to there is obviously the question of where you have struggle to maintain its independence, and I believe two competing and the closure of the last branch in that the directors of HBOS came to the conclusion town and all the rest of it. How do you intend to that the best possible solution for them was to approach that to make sure that as much of a retail embark upon this deal. bank presence is maintained in Scotland? Mr Kane: The approach that we will take to this is Q366 Chairman: Could you tell us was there any first of all what is our customer grouping and our other credible oVer on the table to take over HBOS? potential customer grouping and what a customer Mr Kane: Not that I am aware of. There was a lot of needs in a particular area, a town, a city, a local area. speculation but as far as I am aware there was Once having had a clear view of that by putting both nothing of substance because if there had been that of the heritage branches together in an analysis, if would have had to have been put to the shareholders you like, we then look at the branches we have. If we and I am not aware of anything of substance. I am have two branches right next to each other, which aware of the press comment and I am aware of the does happen, the analysis would look at does it make rumour and speculation, but as far as I am aware, sense to maintain both of them; is one of them bigger Chairman, that is all it was. than the other and could it take on the staV and the customers? Or is neither of them suitable, in which Q367 Mr Davidson: So HBOS essentially was dead case we might close both and open a new one, which but it had not fallen over, but that was not the fault is more fit for purpose. So that is the type of on the of the staV working in the ordinary branches and I ground analysis that goes on. want to explore with you what will now happen to them. I understand that you have indicated that you Q370 Mr Davidson: How will that be handled with are looking to save £1.5 billion as a result of the local stakeholders because Clydesdale, I remember, amalgamation of this. Can I clarify whether or not undertook some closures not all that long ago and you have a policy of no compulsory redundancies they had quite a good exercise. I know that as a local and what your relationship has been with Unite, the member I was involved in that and eventually people union, in particular up to now? were quite happy with the closure, but they did Mr Kane: We have had a long and fruitful actually go through the exercise of involving, relationship with our unions. We now have three consulting and so on. Do you intend to do that or unions: we have Unite, we have Lloyds LTU—the will this be something just driven from Lloyds StaV Union—and we have ACCORD, which headquarters? is the HBOS equivalent. So we have three significant Mr Kane: We have a long track record of managing unions to deal with. Both heritages have a good and and when we did the Lloyds TSB merger, in which I ongoing dialogue with the unions and our position was personally involved, I ran that actual merger for is in rationalisation—and there will be the whole of the group. We had a very, very rationalisation of jobs, let us be clear about it. organised plan and we consulted all relevant stakeholders. So we will listen to primarily our Q368 Mr Davidson: Can you give us numbers? customers—our customers are our number one Mr Kane: No, I cannot because we do not have any people that we sound out before anybody else. numbers at this point in time. Let me explain how we are approaching this whole matter. The integration Q371 Mr Davidson: Customers will normally defend will take place over three years—we are two months the status quo, will they not? Whether it is school into it just now—so we are preparing plans and we closure or any change whatsoever people will have a range of projects and they are being run by normally defend the status quo, so presumably you diVerent business managements. The way that we are not going to put it to the vote of customers will approach this, as particular projects are signed because then you would not get any change at all. oV and where job rationalisation is part of that we Mr Kane: We are not going to put it to a vote but we will look to meet that through natural turnover of are going to consult widely. Also, we do take remote staV—and we have a significant turnover of staV. areas into consideration. We have a small fleet of But to be fair, in economic recession that does slow mobile branches and we will continue to maintain down a bit so we have to be realistic about that, but that—we see that as important for local nevertheless there will still be a significant turnover communities. 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19 March 2009 Mr Archie Kane customer needs. That is our raison d’eˆtre;ifweare Q375 Mr Davidson: No, debt pursuit—there was no not going to meet customer needs and meet them counselling involved; it was debt pursuit. appropriately then we do not have the right to exist. Mr Kane: Debt collection units. Our philosophy in Lloyds Banking Group is to have all customer- facing and all customer contact based in the UK, so Q372 Mr Davidson: I welcome the points that you if that type of thing happened in the past we try to made about avoiding compulsory redundancies make sure that all of that is done from UK-based, wherever possible and I think we understand that in land-based units. exceptional circumstances where there is a misfit that it might be necessary, but in general terms I think we would very much want to see compulsory Q376 Mr Davidson: But you are still transferring redundancies avoided where possible. But in that jobs abroad? context could I ask you about oV shoring and Mr Kane: In certain circumstances where these will be back oYce, administration jobs and particularly whether you have any short or medium term plans Y to take jobs abroad that perhaps could be filled by where we find great di culty in finding the skill base. people who are presently employed by yourselves and could be reshuZed into positions? Q377 David Mundell: I want to follow up on the Mr Kane: We do have a number of jobs which are branch closure issue. I think from what you said outsourced to oVshore companies—but let us call it before am I right in thinking that once this exercise oV shoring—and we have announced, and the is complete that there will not be a community where Unions are aware of a number of programmes which there will be both a Bank of Scotland branch and a were in flight before this deal was taking place. So, Lloyds TSB branch? for example, in my area I think we have some 400 Mr Kane: We will be merging the Lloyds TSB and posts oVshore at the moment and I think the total Bank of Scotland branches and re-branding them as amount that we had announced was somewhere in Bank of Scotland. the region of 500. So those programmes are continuing. But past those programmes we have not Q378 David Mundell: So there will be branch got any plans announced. closures as such? Mr Kane: There will be some branch closures. Q373 Mr Davidson: I think one of your harassment divisions that was involved in phoning one of my Q379 David Mundell: Are you aware at the moment constituents up to ten or 12 times a day to get them how many communities there are, both the Bank of to repay a loan that they were owed was certainly Scotland— based abroad, which was part of the reason why Mr Kane: I do not have that figure in my head but I people could not have any sensible dialogue with would imagine there would be a sizeable number them. And I understand that some of those jobs are where there will be more than one branch, but it abroad at the moment, but how sensible is it to depends on the footprint. If you look across the UK transfer further jobs abroad at a time when you are you will still find old Lloyds TSB branches in the same location and the reason why we have facing job losses here in the UK and in Scotland in maintained some of those is because of the traYc, particular? Surely those things ought to be put on ice the footprint that the customer needs. So it is not until such time as you have clarified the position of absolutely guaranteed that where you get two existing staV? branches on the same high street that one will Mr Kane: We would clearly desire to source jobs and definitely go—it will be customer driven. skills in the UK wherever possible, but we do have to keep in mind that we are in competition and therefore we have to try to avail ourselves of all of Q380 David Mundell: What will be the process of it the available opportunities. If we cannot find the in terms of determining it? skills or we cannot get something done in a Mr Kane: As I mentioned earlier, it will be very particular fashion— careful analysis of customer footprint, the physical capacity of the branches and the staYng of the branches. Then a decision will be made could either Q374 Mr Davidson: That is right, but the jobs that of these branches handle it physically, and if they you transferred to your harassment division, for could not do we maintain them? It also depends on example, could quite easily be done by people in the the leases on the branches or whether they are UK. This is repeatedly phoning up to get debt repaid owned. If they are both inappropriate and we think and so on and this could quite easily be done from that perhaps on the property side it makes some the UK. Given that competition legislation was sense to rationalise it, both of them could be closed suspended to allow you to take over HBOS I would and a bigger one opened in the same vicinity. It will have thought that competition ought not to be the be any one of those three groups. sole driver when you are looking at these jobs possibly being made compulsory redundancy and to Q381 David Mundell: Some commentators have felt try and avoid that. that one of the reasons that HBOS was not the Mr Kane: I do not recognise the term that you use success that it might have been was because Halifax but I assume that you mean something like debt and the Bank of Scotland did not integrate as counselling units or debt collection. eVectively as they might have, particularly on the Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane branch front. Are you satisfied that the Bank of Mr Kane: I want to be very clear about this. We will Scotland, as was HBOS, has the right amount of be applying our approaches to risk and our branches currently? approaches to credit decision-making and our Mr Kane: Currently in aggregate we will have 500 approaches to risk appetite, and we are already branches in Scotland—by far the biggest branch starting to roll that out. network in Scotland. That will change—the number will change—I do not know what it will end up, but we intend it to be the biggest branch network in Q387 Mr McGovern: Mr Kane, if we could go back Scotland. Therefore, I think we will have a very to the subject of employees and their positions, adequate coverage for our customers. obviously I am well aware of the trade union Unite, which is probably the largest trade union in the UK now. I think I have heard of ACCORD; but I have Q382 David Mundell: But in order for that to happen never heard of the LTU. Could you just confirm for does that mean that it has to come down to 400 or me whether these are independent trade unions to 300? recognised by the TUC? Mr Kane: I cannot give you a number because we Mr Kane: I do not think that LTU is part of the just have not done the work. TUC. I know that because I come from that side. ACCORD, I honestly do not know if they are Q383 David Mundell: In relation to the individual aYliated or not. Yes, I am told it is. staV in the branches, how will they be dealt with? Mr Kane: It is so important to get not only the right number of staV in your branches but to get the right Q388 Mr McGovern: On the subject of negotiations quality and we are very fortunate as we have some with the unions in a redundancy situation, obviously fantastic staV in our branch networks. So we will be it is incumbent upon an employer to mitigate and V minimise any redundancies, so would employees be looking after those sta very, very carefully. And it is V wrong to assume, as sometimes some people do, that o ered the opportunity to relocate and is there a if you have two branches—and let us say they were possibility that employees might have to reapply for both the same size in terms of customer base—and new posts in a structure which could mean a decrease you shut one and merged it into another that the staV in salary, or in such a situation would the salaries be in the closed branch go because that is not the way preserved? it works. You have to service the combined customer Mr Kane: It all depends on the particular circumstances and the area, but people will be base, so generally speaking the vast proportion of V staV are maintained. o ered opportunities where those opportunities exist. So we have a long track record of trying to go through and trying to ensure that people in the Q384 David Mundell: One of the complaints that my areas—good, long serving skilled people—have the constituents would have about the Bank of Scotland opportunities to apply for jobs and we have pretty and particularly people involved in small rural good experience of a pretty good process for doing communities and agriculture, was that the changes that. By and large they will be jobs that would be during the HBOS era were away from local decision- appropriate for their skill and their level and by and making and that very few decisions could be made in large they should not encounter a decrease in salary. these branches or even at a regional level. Is that a I cannot say that it would never happen but by and criticism of HBOS that you are conscious of and large that is not normally what happens. something that would change under the Lloyds’ culture? Mr Kane: I am not particularly aware of how HBOS Q389 Mr McGovern: But there is a possibility of a was run and clearly I was not there. Generally situation where current employees, perhaps long speaking it depends on the decision that is being serving employees, would have to reapply for some made. If it is an individual’s credit decision, i.e. a new positions? loan to be made there is a set procedure that we Mr Kane: That has happened already in the top 400 apply. If it is a corporate, a business type lending appointments in the company. I had to reapply for then it can be done to a certain level by local staV and my job; everybody had to be considered again. So that will be corporate, commercial or SME bankers, from myself down to the next level and to the level so it would not be the local person serving the below that in order that we had the top 400 in place customer in the branch, it would be the appropriate there was a process gone through. We did a similar bankers. And depending on the size of it, it will go thing in the Lloyds TSB management. So it is a to a higher level sanction. But that really is common pretty fair process—everybody gets a fair crack of practice in any bank nowadays. the whip.

Q385 David Mundell: But it will be the Lloyds’ Q390 Mr McGovern: If somebody applies for a post criteria that now apply in relation to that decision- and they are unsuccessful what happens? Is the making process? contract terminated or are they made redundant? Mr Kane: Absolutely. Mr Kane: They would then go into a process of seeing if there were any other opportunity and if Q386 David Mundell: There will not be some distinct there were not then eventually they would go into a Bank of Scotland decision-making process? process of redundancy. That is how it works. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane

Q391 Mr Carmichael: Do you have a timescale in Q398 Mr Wallace: On the back of the bonus mind? structure, do you believe that the concept of a Mr Kane: Three years. guaranteed bonus is something that should be scrapped? It is a very peculiar thing. Q392 Mr Carmichael: How many staV earning more Mr Kane: It is extremely unusual, I have to say, for than £20,000 have contractual bonuses this year and us to pay any form of guaranteed bonus. It is usually what will that amount to in total? I am not expecting only when you are seeking in a competitive market you to have the exact figure. place to hire somebody, and it is usually only a Mr Kane: I do not have the exact numbers of staV certain amount, and the reason is that somebody is who earn more. As you know, we have agreed that leaving on the table a pretty sizeable sum and you do people earning under £39,000 and getting a cash some form of negotiation. So I would not want to get bonus of no more than £2000 will get their cash this out of context; this is not custom and practice, bonuses. We have also agreed that people in selling this is usually only done in very, very limited jobs who have sales incentive schemes will get paid circumstances. I would agree with you that we would according to their sales incentives schemes. not support the concept of a guaranteed bonus as a Everybody who is above and outside that criteria principle and we do not practise that. On the subject will not get a cash bonus and myself and my fellow of bonuses—because it is a hot topic and a directors have waived our cash bonuses for the last controversial issue—my view and the view of our year—we are getting no bonuses for last year. company is that bonuses per se are not a bad thing, it is how they are measured and how they are paid— that is the appropriate thing. What we do in our Q393 Mr Carmichael: Because this is a growing area company,we have a thing called a balance scorecard, of concern amongst your own staV, I know that so if you were to hit your numbers, in other words hit much from my own constituency caseload. Which the financial targets, that is not the only thing that executives, if any, will be receiving obligatory defines your bonus. There is a set of criteria which bonuses this year? you also have to meet, and that is things like building Mr Kane: Contractual? the long term business, customer service metrics, people management and how you are developing Q394 Mr Carmichael: Yes. your people and risk management. So if you have a Mr Kane: If there are particular contractual proper set of measurements in place then bonuses are arrangements—and an example would be that we fine, but it is how they are measured and how they have recently hired an executive, say, and he or she motivate people, that is the real issue I believe. came into the organisation and because they were giving up something from whence they were coming Q399 Mr Wallace: The thing I find odd about the they were guaranteed a certain amount, and that was bonus culture is that it is very complex with the part of their contractual entitlement—legally we matrixes and hitting your scores and it is have to pay that. discretionary and everything else—and I agree about incentive, that where you have a bonus it is Q395 Mr Carmichael: That is what the contract is very important. Not that long ago, but it is in the there for. past, some of the investment banks ran on Mr Kane: Yes. So those types of cases we would pay partnership lines, the Cazenove type section. One of cash bonuses. Outside of that, unless they are our most successful retail companies in Britain, John operating in excluded areas, and an excluded area Lewis, still runs on that type of line and both those might be fund management, for example, which is a do develop teamwork—we are all keeping an eye on separate company and operates in a completely each other because it is all in our interests at the end diVerent market place and it is really nothing to do of the day to do so. Do you think that the modern with what we are talking about. banks are just too complex to do that or do you think that actually that is something that should be explored in future? What we come against is that we Q396 Mr Carmichael: Do you envisage in the find cashiers are put under undue pressure to fill their V medium to long term having a di erent structure or matrix. I hate going to a bank—I hate it when they V di erent approach to bonuses within your group? say, “Mr Wallace, would you like a loan?—No, I Mr Kane: I think remuneration in banks, possibly want to cash a cheque, thank you very much”—and financial services at large is going to change and I this poor individual is forced to ask all these sorts of think it is probable and highly likely that it will be questions to meet their ticks in the boxes. V di erent from the way it was done in the past. So I Mr Kane: The first thing to say is that the am clear as to how it is going to settle, but if you are appropriate thing to do is to meet yours and other asking my personal opinion, yes, I think it will customers’ requirements. So a process which is change. driving behaviour which is inappropriate for customers I and we would not support. Q397 Mr Carmichael: And the Turner proposals Nevertheless, it is important for all employees in the presumably would be a straw on the wind. company to take a balanced view. If you do not have Mr Kane: The Turner proposals will clearly have that balanced view you have people just focusing on some influence in the whole thing, but the specifics one thing and if you get that then the more excessive have to come out. behaviours that you have seen in the trading type Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane environments within investment banks, that is where Q404 Mr Davidson: Even in the ordinary branches, the big numbers tend to be, and that does drive the counter staV and so on and so forth. particular behaviours. We believe firmly in a much Mr Kane: Some branch staV will be employed in more balanced approach to it and we think that sales; for example, we have regulated sellers who works and we think it drives the appropriate operate in branches. behaviour and also drives prudent behaviour for the organisations. Q405 Mr Davidson: These are staV that you would normally consider to be servicing staV, tellers and Q400 Mr Wallace: You do not think that a the like. V partnership system would work for retail banking? Mr Kane: Servicing sta will have as part of their Mr Kane: You mean a´ la John Lewis? score card a range of measures and one of those might be passing leads to the selling community.

Q401 Mr Wallace: Yes. Q406 Mr Davidson: So you are not intending to Mr Kane: I have to say that I have never really change that at all? considered that. John Lewis is quite unique in the Mr Kane: We constantly revise our score cards. way that it operates. I think it is fine and it has a long history of doing it but I am not aware in financial Q407 Mr Davidson: Is that a yes or a no? services of a similar environment other than those Mr Kane: We are in the business of meeting our privately owned type of firms which tend to run on customer needs and in order to do that we have to a partnership basis, and they all tend to be either sell products and we— investment banking or brokerage type environments. Q408 Mr Davidson: There is a diVerence surely between selling products and trying to drive Q402 Mr Davidson: Can I follow up this question of products. A number of my constituents have staV, particularly the lower paid levels because when complained to me about contacting the banks and we met Unite and we met the STUC—and many of them constantly trying to sell to people. The point us have met other bank staV—we were told about they make is that in economic diYculties here is the how for those who were on low pay quite a bank trying to sell me loans and wanting me to take substantial amount of their income is actually from out more money. Not so much actually trying to get bonus and it is generally sales driven, which them to save money but wanting them to take out therefore means that there is a whole culture in the more and more money, constantly oVering them branch about trying to sell things all the time to more money. That is part of the culture that has got customers and that it used to be the case—and I do us into the diYculties we are in, to which you have not know if you have changed this and I would like contributed. I am asking you really whether or not to hear if you have—that the emphasis was all on you are changing that. selling loan products rather than savings products, Mr Kane: I can tell you right now that we are very so that every time people were contacting the bank keen on branch staV to take deposits and savings— they were making an eVort to sell them this, sell them savings is a big issue for us. that, sell them the other and it was not a service mentality at all. Given the points that you were Q409 Mr Davidson: So it has changed. The bonus making about the culture that you are trying to system has changed, has it? encourage and the behaviour you are trying to Mr Kane: It constantly changes; it depends on the encourage, if you do have a situation where the environment we operate in. frontline staV do have a substantial amount of their salary on a bonus culture and a bonus culture which Q410 Mr Davidson: That is somewhat of a get-out. is driven by sales targets then of course you get that Can you maybe give us details of what the bonus sort of relationship and the branches were actually system—not necessarily just now but in writing—for just reflecting the ethos that was at the very top of the counter staV is; how they are rewarded, so that we bank, which got HBOS and the Royal Bank of can demonstrate that it has changed from the period Scotland in particular into this mess. Surely you in the past. should be changing that in line with changing your Mr Kane: It changes all the time. I would be happy own circumstances. to do that.4 Mr Kane: That is my very point. The point is that if you just target people in a particular fashion and you Q411 Mr Devine: Can I just ask you about this reward and remunerate them in that fashion you culture because it is not just the staV that you meet. cannot be surprised if they behave in that fashion. Farepak collapsed in October 2006 and in February Therefore, the importance of having a balanced 2006 they had a meeting with the Halifax Bank of approach to it, which has customer service very Scotland. I understand from Farepak managers that heavily weighted. they had an overdraft of about £20 million and it was actually extended at that meeting, despite the fact Q403 Mr Davidson: We have been told that your that Farepak said that they were not going to deliver. staV are motivated to sell things. In June of that year Farepak management wrote to Mr Kane: Some of the staV are motivated to sell things because that is their job. 4 Ev 122 Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane the Halifax Bank of Scotland asking for the money Mr Kane: I clearly know about the proposal that to be ring fenced and they refused it. The last date to they were trying to make because it was widely put the money in if you were an agent with Farepak reported in the press at the time. My understanding was October 13; you had to pay your money by 3.30 is that the HBOS board, I think they must have on October 13. At quarter past four Farepak went communicated with them but came to the into receivership. Farepak management stuVed four conclusion that it was not a realistic option. other companies with money and the Halifax Bank of Scotland got their money but tens of thousands of Q415 Pete Wishart: Getting back to the competition decent hardworking families basically had issues you will obviously be aware of the OYce of Christmas cancelled. The culture of that, as was Fair Trading report which said that this behemoth of explained to me, was that there was a business risk a bank has been created that has real competition unit operating in the Halifax Bank of Scotland and issues which are outstanding, particularly in the it was their job to get as much of the money back as SME sector, and in terms of financial personal they could and they were successful and the finance. How do you see this operating within the consequence of that success was that they got a financial sector and the small business sector? Are substantial bonus. So the whole culture was geared you going to be taking advantage of your role as this to basically providing, I would say, an inadequate massive bank out there and what are your concerns service and in this case the Farepak customers were about competition given this takeover and how you very much a secondary consideration. will operate? Mr Kane: I am aware of the Farepak case because it Mr Kane: Our intention is to compete strongly. We was widely reported at the time and I have great want to maintain and to grow our relationships with sympathy for the people who suVered because of our customers. The whole ethos of Lloyds TSB and that. I have to say that I was not around in HBOS at Lloyds Banking Group is about long term customer that time so I cannot comment on how the whole relationships, so building a relationship with the issue was handled from the point of view of the customer, be it an individual or be it a business, and banking side. I am aware that HBOS banked, I following that through throughout the lifetime of think, the holding company of Farepak. I am also the customer. So we want our customers to survive aware that subsequent to that HBOS has set up a and succeed; we want them to be successful and we Christmas type savings scheme which it has put out want to stick by them through thick and thin where into the market place; but further than that I do not we can possibly do that. really know the ins and outs of that particular business. Q416 Pete Wishart: I understand that of course you want to do that for your customers and you want to Q412 Mr Devine: You started out by saying that do that with a whole range of services but do you your company,Lloyds, was prudent, responsible and have any concerns at all about the impact on here you meet Halifax and the implication was that competition that this takeover has? there was a very diVerent culture prevailing there— Mr Kane: Not from our perspective. We intend to that they were not as prudent as you were, they were compete. Banking services and financial services in not as careful as you were, and in fact some would the UK is a highly competitive environment. If you say that they have been quite reckless to the extent look in the market, mortgages, for example, have that they were £8 billion in debt. Have you changed declined dramatically since 2007—I cannot that culture? remember but there were so many oVerings on the Mr Kane: We definitely operate a diVerent business market. The reason it declined dramatically is model from the one that HBOS operated and we because a number of foreign banks upshot and left intend—and we have been very clear about this— and a number of other institutions went out of that the model that will operate in the Lloyds business—Northern Rock and so on and so forth. Banking Group will be the Lloyds TSB model and the whole approach to risk and risk appetite will be Q417 Pete Wishart: Do you think that the OFT got that model, so it will be diVerent going forward. it wrong about the competition with the stakeholder and they misunderstood how you are trying to Q413 Mr Devine: So HBOS was wrong in the way operate? they talk to people? Mr Kane: I totally understand the OFT and the Mr Kane: I was not around in HBOS at the time so competition views and where they are coming from I do not know how they actually came to the and it is their role to ensure that there is appropriate decisions, but they clearly had a view of the world competition within the UK market. I believe that and operated in a diVerent fashion from the way that there was, there is and there will be very strong we operated—that I do know; further than that I competition in the UK. cannot say. Q418 Pete Wishart: Have they got it wrong? Q414 Chairman: You will be aware that the proposal Mr Kane: They have a very understandable point was put forward by Sir Peter Burt and Sir George of view. Mathewson, Chief Economic Adviser to the First Minister in Scotland, to stop the acquisition of Q419 Mr Davidson: Can I ask about your HBOS by Lloyds TSB. Do you think that was as relationship with your individual customers because realistic option? obviously now that you are bigger you are going to Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane be more powerful in the market and there is a lot of Q421 Mr Davidson: I am quite happy to arrange a unhappiness about overdraft charges and fees and meeting between yourselves and the appropriate the like. Are things going to get better or are they agency because they have actually said that HBOS, going to continue to be as they are at the moment? for whom you are now responsible, were the worst at Mr Kane: Our relationship with our individual this practice but certainly no complaints have been customers is extremely important; day in and day made about Lloyds doing it as well. They out that is how we have the right to exist, so looking particularly raised with me an issue about which I after our relationships is very important. We are in a was not aware before, that they termed the right of set of economic circumstances, a global recession at appropriation, which means apparently that you the time and we as a company and we as a country, have to leave enough money in people’s bank be it Scotland or be it the UK, cannot just take accounts in order for them to live, but there have ourselves out of that. So that means that there are been the occasions where people have had debts, going to be diYcult times for everybody going money has come in and the bank has seized so much through this recessionary period. So we will have to of it that in fact they did not have enough in it to live. operate in a fashion commensurate with that but the That does seem to me to be inappropriate. one thing that we will definitely do is we will seek to Mr Kane: We have to behave according not only to maintain and support our customers as best we the appropriate rules but also in an appropriate possibly can through this diYcult period. fashion and that is our intention always. If we have specific circumstances where that has been breached we would certainly look into that. Q420 Mr Davidson: Before this meeting I spoke to one of the advice centres in my constituency and under the heading of harassment they were raising Q422 Mr Davidson: Can I ask then about customer the point about customers of yours and constituents lending to small businesses because, as you will of mine who get into financial diYculties having appreciate, quite a number of us have had taken, in some cases, loans from yourselves that your complaints about banks being less than helpful and staV were given bonuses to push, and then coming to there was a survey done recently in my area where an arrangement to repay but still constantly being people were raising objections such as minimum contacted by yourselves, and clients are constantly charges have gone up, interest rates were dreadful, being contacted by banks even though the no flexibility of taking into consideration individual arrangement is in place. So they have an unique circumstances and so on and so forth. Now arrangement to pay back the money but it is as if that you have had huge dollops of money from the there was a competition amongst the banks to try Government and given that the Government quite and get more than what had been agreed. Four or clearly wants to make sure that small businesses are five times a day calls being made and examples have helped, what assurances can you give us that you are been brought to me where there were up to a dozen going to be more understanding in future? calls being made pursuing money, even though an Mr Kane: We always seek to support our customers, arrangement in some circumstances was in place. Do be they SME or otherwise. The SME sector I you not have a responsibility in a time of economic understand has had a great deal of publicity and diYculties to be a bit more understanding? I there are clearly a range of diVerent cases. We will appreciate that there will be what we have described seek to maintain our relationships with our SME in other contexts as rascals and chancers who will clients and we will seek to maintain that in a sensible seek to abuse the system, but none the less the vast and appropriate fashion. But it is true to say that majority of people who are raising concerns with me firms do get into trouble—there is no doubt about are not in that position and in many cases even the that—and some firms get to the point where there is rascals and chancers have actually been given money nothing we can do to sustain that firm going by yourselves who have almost pushed it on them by forward. So we can be understanding, we can have a constant oVers of more loans and so on and so forth. dialogue but at the end of the day we do have to look I want to be clear about how you are going to behave after the commercial reality of the relationship. in these circumstances? Mr Kane: I think it is perfectly right and proper to Q423 Mr Davidson: I do understand that; I do expect us as an institution to behave properly and understand that you are not there just simply to keep appropriately. I and my colleagues would never step pouring money into a hole—I understand that away from that. I am sure you have specific cases completely—but the feeling coming back from although I am unaware of them. Our philosophy is businesses which are experiencing these quite to communicate with customers when they get into diYcult times but are still viable is that you are less diYculty and to try and help them through the than understanding and that in many cases the diYculty by restructuring and coming to other problems are exacerbated by reductions in arrangements. If it gets to the point where somebody overdrafts or increases in charges, which is not the has been called the number of times that you have help they are looking for in those circumstances. indicated I could not possibly defend that—in fact I Mr Kane: Our philosophy is to help our customers cannot think of a good reason for that. I can tell you through diYcult times. There may be particular that that is not the way we seek to run our cases which appear to be diVerent but our organisation. If it is happening I and my colleagues philosophy is to help those customers through would like to know and we would do something diYcult times. What does that mean on the ground? about it. That means that if we have an arrangement with a Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane customer, a facility,we will honour that facility to the Q427 Chairman: But then why are the banks point that the facility matures. Then they will go appealing the Court of Appeal decision in favour of through an appraisal process and this is standard— consumers that the OFT can consider the fairness of this happens all the time. If the credit rating of the the overdraft charges? customer has changed in that period then it may be Mr Kane: The banks believe that in that particular the facility that they previously had is no longer case that they have a legitimate case and that is the available, for reasons to do with the sector they are banking industry at large. in, how the business is performing and how the cash flows are, and so on and so forth. So that is normal Q428 Chairman: When this Committee took practice. When we are in diYcult times we try as best evidence during our Poverty Inquiry we heard that we can to be receptive to those diYcult times, but we one in five members of the Scottish and British do run that type of process. public, who are subjected to high charges by the banks, were often vulnerable through serious illness, relationship breakdown, unemployment or other life Q424 Chairman: The businesses in our crises. The banks claim that bank charges pay for constituencies are telling us that in spite of free banking; but to be honest I do not accept that substantial reduction in the base interest rate the proposition. Since I have always held the view that overall burden on the businesses from the bank the Lloyds TSB is the best in the bad lot, can I ask remains the same and in some cases has increased. you this question: is it morally acceptable to charge For example, overdraft changes and arrangement the poorest and most vulnerable members of our fees; one of the businessmen in my constituency was society to fund your so-called free banking? telling me that they used to pay an arrangement fee Mr Kane: The first thing I would say is that Lloyds for the review of the overdraft every year at 0.1% and TSB and Lloyds Banking Group is heavily involved now the bank is charging them 1%. So that is ten in social banking and we have embarked on that in times more than the previous year. Do you not think a serious manner. I think we have about four million that this is unreasonable that the businesses are not accounts in the UK and I think it is some 650,000 getting the benefit of the reduction of the interest social banking accounts in Scotland, so we take that responsibility very seriously; and it is important to rate? realise that we make no money out of those products Mr Kane: I think it will depend very much on the at all. So we had that debate a long time ago and we individual circumstances of the customer and also of agreed that we should support that initiative which the bank. we think is a socially responsible thing to do. We also try to migrate those customers, as those customers develop, on to what we would call standard banking. Q425 Chairman: I am talking about HBOS. So in the past those people might have been un- Mr Kane: HBOS, as you know, last year had a banked and they might have had to go to other funding problem and had to withdraw very much sources of finance and/or ways to pay bills and that from the lending market; it was in a diYcult set of could have led them into diYculty; so we realise that circumstances. Lloyds TSB actually increased its that is an important thing and we have taken that lending to the SME sector in 2008 by 20% over 2007. very seriously and we will continue to do that. The reason why there is still a problem is that 40% Having said all of that, we are in the business of risk of the market disappeared—foreign banks or other analysis and risk-based pricing, so we cannot avoid banks just shutting up shop. So people like it in certain circumstances—and this is done very ourselves—and there were one or two other banks carefully, and I am talking outside of social banking. that increased their lending to the SME sector— We analyse very carefully the circumstances of the struggled, quite frankly, to fill that gap. But Lloyds individual customers and companies and we form a TSB increased by 20% more or less—it was almost view as to the risk of those customers, and our 20%—throughout the UK, and I think in Scotland pricing is based on risk—that is the way our our net lending to the commercial SME sector was industry works. something like 27% up in 2008 over 2007. So we were actually putting more lending into the sector. Q429 Pete Wishart: If that is the case why is it that Nevertheless, there will be certain circumstances when interest rates are almost zero am I still paying where either the credit rating or the position of the something like 22% on my HBOS credit card? company has changed. Mr Kane: Credit cards operate in a competitive market and it depends upon the circumstances. I am not quite aware of the 22% but I know that we have Q426 Chairman: So why do you think that with a range of credit cards which range from round unreasonably charges and fees consumers do not about 9 or 10% up to into the twenties, depending on have the right to challenge the banks and the OFT? the credit card and the service. Mr Kane: There is always an ongoing dialogue between the bank and customers, whether they are Q430 Pete Wishart: Should there not be a closer individuals or companies, have always the right relationship between borrowing and saving when it under the law to challenge if you think that a practice comes to the interest rate? The base rate interest is is not fair under the regulations. That exists and will down to almost zero to try and reflate the economy continue to exist. but at the same time people are not going to be Processed: 12-03-2010 18:51:20 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane spending on their credit cards and if they do they get turn to alternative measures and some of those into this sort of trouble. I have a number of alternative measures result in very, very high constituents who are in really serious trouble interest rates. because of the interest that has been applied to the credit card and wonder how on earth they are going Q434 Chairman: For example, if somebody has a to be able to deal with and it seems to them totally limit of £1000 and when the cheque hits the bank unfair and unjust that there does not seem to be a they have £25 more than the overdraft limit that they relationship between what they are required to pay use and the bank charges them £39, how can you on their credit terms in terms to what the justify this? Government is doing in terms of bringing down Mr Kane: If somebody operates within their agreed interest rates. contractual terms, i.e. they stay within their agreed Mr Kane: There are a range of alternatives to credit limit then that is fine and they have the normal borrowing on credit cards and in fact there are a rate, but if they operate in an unauthorised fashion number of 0% credit cards on the market for balance then they do get charged. transfers and for purchases over a period of time. There are also arrangements for personal loans; and Q435 Chairman: Do you not think there should be mortgage rates are at the lowest in living memory, some balance there on how much they should be certainly in my working lifetime. There are a whole charged rather than just leave it to the bank? range of alternatives out there. We try to oVer to our Mr Kane: The banking industry has generally come customers an appropriate range of products for to an agreement that they will charge certain them to be able to operate. Unfortunately amounts for overdraft letters. sometimes customers either make the wrong choice or operate their finances in a way that is perhaps not the optimum. But generally speaking we put a range Q436 Chairman: £39 for a letter. of products to our customers and a range of them are Mr Kane: Not everybody charges £39 but there is a very good; we do have 0% credit cards on oVer at the range from I think about £20. moment. Pete Wishart: I will have to get one of them! Q437 Chairman: So whoever is charging £39 you think is unreasonable? Mr Kane: I think diVerent institutions will form their Q431 Chairman: Do you accept that when the base view as to how they wish to operate. rate is half a per cent and if banks or the other financial institutions are charging people 22%, that that is almost 400% profit? Q438 Mr Davidson: How much do you charge for Mr Kane: As I have said, we have a whole range of a letter? products and it depends on the particular product we Mr Kane: We do charge in certain circumstances on operate. For example, we have savings products out the HBOS side up to £39. there on the market at the moment, a regular saver account that pays 4% and on the Halifax side and Q439 Mr McGovern: On that subject of charges, I Lloyds TSB we have two-year fixed rate savings at have had quite a few constituents come to my local 3.5% and a whole range of products there. On the surgeries, very often single mothers who have found mortgage side we have tracker rates starting at themselves in the situation where, for one reason or around 3.5% and in Cheltenham and Gloucester we another, they have missed their direct debit payment have standard variable rates running from 2.5% to and it causes a charge and the knock-on eVect is that 3.5%; so we have a whole range of products. Some of they then miss another direct debit payment which them will be towards the more expensive end. causes another charge. One particular single mother found herself in the situation where she owed the bank something like £280 and she had never spent a Q432 Chairman: But there must be some limit and penny of it—it was just charges. Is that justifiable? you have to strike the balance, but do you not think Mr Kane: These circumstances do happen, I that if the base rate is half a per cent and the banks absolutely understand. They are relatively limited and financial institutions are still charging 40% or and I believe that they are to be avoided at all cost. 50% that it is morally unacceptable and it should be Remember, we are dealing with large numbers of legally unacceptable as well? customers so there are processes in place that V Mr Kane: Most of the products that we o er do not sometimes work in that fashion; but generally charge anything like that. speaking we would not seek to operate in that fashion, we would try to communicate with the Q433 Chairman: Do you not think then that there individual and try to come to an arrangement. should be a cap on the borrowing? Mr Kane: No, I do not actually believe that a cap is Q440 Mr McGovern: If that does not happen I appropriate. I think that the competitive market is would be entitled to write to the bank and say, the best way to handle this. Remember, if we do not “Please scrap this”? allow banks to operate on a risk-based pricing basis Mr Kane: I am not going to deny that sometimes there will be sections of the market that will not be circumstances like that do happen; there are cases serviced, and the consequences of not servicing those like that, I agree with you. We do not want those sections of the market may mean that they have to cases to arise if we could possibly avoid them. Processed: 12-03-2010 18:51:20 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG3

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19 March 2009 Mr Archie Kane

Q441 Mr McGovern: I should say that I am not ending up with £280 of overall debt, is there a referring specifically to Lloyds Banking Group. mechanism by which we can raise these things with Mr Kane: I understand. you? I have raised several issues about what I believe to be inappropriate behaviour. When we had Mr Pell Q442 Mr Devine: You told us at the start that HBOS in here from the Royal Bank of Scotland he said that no longer exist but you are now saying that you have we should just be raising these with him if we have a range of charges but I am still getting charged particular examples of bad behaviour that we HBOS’ rates. If HBOS does not exist why are you thought arose from procedures, as distinct from charging me these rates and why do you not give me individual casework. What is the appropriate the Lloyds’ rates, which obviously sound a lot more mechanism in the case of Lloyds Group? favourable? Mr Kane: We have areas which handle that issues Mr Kane: Let me clarify: HBOS as a quoted public that are raised. People sometimes write to me; people company no longer exists; you cannot find its shares sometimes write to other executives, from the anywhere and it is now owned by Lloyds Banking Chairman down, and we have a process for Group, so that is the entity that exists. Within it there responding and taking action where appropriate. are still two separately regulated institutions; so you have HBOS is part of it and Lloyds TSB is part of it. Q448 Mr Davidson: So you would take They still operate under the products and the responsibility for pursuing some of these things if we services and the pricing that they had. We have not wished to raise them with you? had a chance to review that or change it and that will Mr Kane: I will take responsibility for making sure take place over time. that something happens about them in an appropriate manner. I cannot do it all myself Q443 Mr Devine: So it is fair to say at the moment physically; but in terms of Scotland at the end of the that although I was formally with HBOS that there day I am the main board representative for the group are two sets of charges? You as Lloyds have one set responsible for Scotland so the buck stops with me and a range of charges, interest rates, various in terms of overall responsibility. So I accept that mortgage rates and such like, and HBOS have a responsibility and I will try to make sure that it gets diVerent set of charges? to the appropriate place, area, department to be able Mr Kane: That is correct, as we sit here today. to take appropriate action.

Q444 Mr Devine: How long is that going to Q449 Chairman: Before I conclude, Mr Kane, I do continue? appreciate that you take your social responsibility Mr Kane: That will be part of our process as we go very seriously and many community groups tell us through the integration process. It will take some that the Lloyds TSB Foundation is helping them and time. It depends on the particular product, it I want to declare my vested interest here as well depends on the systems, and it depends on the because whenever a survey has been done over the last 12 years as to which is the best institution in the integration programme. banks, I have always put Lloyds TSB number one. Mr Kane: Thank you very much, Chairman. Q445 Mr Devine: Could you send to the Committee a copy of those sets of charges? Q450 Chairman: Because of the good works I hear Mr Kane: Yes, absolutely; they are public but I will about from my constituents. Once again, thank you 5 do that for you. very much for coming and giving us evidence. Before I close the meeting would you like to say anything in Q446 Mr Davidson: Can I just mention about your conclusion perhaps on areas that we have not charitable division—as you are aware, I attacked covered during our questions? your harassment division earlier on—and just say Mr Kane: All I would say is that I was very happy to how much we appreciate in an area like mine the come and talk to you. I appreciate the candour and work that the—I cannot remember the name of it the questioning and I think you have raised a lot of now. very important issues. I and my organisation would Mr Kane: Lloyds TSB Foundation. rather hear about issues and engage in the appropriate dialogue than try to pretend that these Q447 Mr Davidson: How much that does; that has things do not exist. We are in very diYcult times and been very helpful. It is behaviour like that which we want to get through them with our customers and does actually give banking a good name as distinct we want to get financial stability sorted out and we from some of the other things. Coming to the other believe that a lot of us have addressed that; and we things, though; the example that my colleague Mr want to get the economy back on track as best we McGovern gave about the £39 and the person can because that is good for us and it is good for everybody—all of our fellow citizens in the UK. 5 Ev 121 Mr Kane: Thank you very much. Processed: 12-03-2010 18:52:05 Page Layout: COENEW [SE] PPSysB Job: 439642 Unit: PAG4

Ev 68 Scottish Affairs Committee: Evidence

Wednesday 25 November 2009

Members present: Mr Mohammad Sarwar, in the Chair

Mr Ian Davidson Lindsay Roy Mr Jim Devine Pete Wishart Mr Jim McGovern

Witnesses: Mr Colin Borland, Public AVairs Manager, Federation of Small Businesses and Mr Norman Banski, Law Society of Scotland, gave evidence.

Q451 Chairman: Good afternoon. I would like to which damages their credit rating. We have also welcome our witnesses to today’s evidence session. found that simple things like buying stock are very, Can you please introduce yourself for the record? very diYcult. For example, a florist who could not Mr Borland: I am Colin Borland from the buy any extra stock, because she had Valentine’s Federation of Small Businesses in Scotland. Day and Mother’s Day coming up, because the Mr Banski: I am Norman Banski representing the florist could not get the credit extended to buy the Law Society of Scotland as a Council member and stock and to do their business. We have had a member of the Professional Practice Committee numbers of practical eVects like that. Always when of the Economic Impact Group. things are diYcult and cash flow is reduced the first things to go are the marketing budget, the training Q452 Chairman: Before we start asking detailed budget and all those sorts of things. What our questions would you like to say anything by way members tend to tell us is that they want to try to of opening remarks? avoid job losses. That is for basic human being V Mr Borland: I am happy to go to questions. reasons because they know who their sta are— Mr Banski: Perhaps just to state the statutory they know who the fathers are, they know what the function of the Law Society, Mr Chairman. Section kids want for Christmas—but it is also for good 1 of the Solicitors (Scotland) Act 1980, section business reasons as well because you invest a lot of V 1(2)(a) is the promotion of the interests of the money in your sta and replacing them is solicitors’ profession in Scotland, whilst section expensive. So it is the last thing that we want them 1(2)(b) is the promotion of the interests of the to do. We also do not want them to irrevocably public in relation to the profession, so it is wider. damage the business, so that when the upturn does come they will then be ready to take advantage of it. So that is very quickly a rough idea of what our Q453 Chairman: From your members’ experience members are telling us about what they have seen could you give us a broad outline of the impact of in the last year or so. the banking crisis in Scotland today? Mr Borland: In terms of where we are at the moment, we are in a far better position than we Q454 Chairman: Is the impact of this recession the were at this time last year. I think that if you look same in Scotland and in other parts of the UK, or V at some of the evidence which came out yesterday is there any di erence? it served to drag us back a little bit and remind us Mr Borland: I did look out some figures about exactly how serious the situation was a year, 13 lending rates—Scottish figures versus UK-wide. We months ago. That said there are still some serious actually do a lot better in terms of lending rates. problems that very good businesses are facing As I said, 12% rejected in Scotland and 15% of UK- through absolutely no fault of their own. A year wide members have been refused a loan or an ago the question was access to finance; of overdraft. What you can possibly derive from some somebody wanting a loan for a perfectly valid of the figures is that the increase is probably slightly business or a perfectly valid proposition, which is higher in Scotland but it is spread across. The vast going to make money for themselves, the bank and majority, about two-thirds, have seen an increase of the company, but not being able to access it. The about 2% and 5% on the cost of the finance. That most recent data we have from members—the is broadly reflected across the board, but there do November 2009 data—is that about 12% have been seem to be slight skews at the upper end of that. V refused by banks in terms of funding. The questions That is the only interesting statistical di erence, I now are around the cost of finance. We are seeing would say. about 30% of members reporting a cost increase of existing finance, including their overdrafts; and Q455 Lindsay Roy: Has Government intervention about 26%—just over a quarter, and fortunately it through the fiscal stimulus been broadly welcomed? has stayed about a quarter—reporting an increase Do you have feedback on positive outcomes for in cost of new finance. Some of the practical eVect small businesses? of this has been that people have used more of their Mr Borland: One of the things that we argued quite own money to pay into the business. They have strongly for ahead of last year’s Pre-Budget Report also experienced cash flow diYculties, which makes was some sort of enterprise finance fund and that it more diYcult to pay their own customers and was delivered in as the Enterprise Finance Processed: 12-03-2010 18:52:05 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Colin Borland and Mr Norman Banski

Guarantee Scheme. As I said, I think it serves us well sales over Scotland. I would like to think that we are to remember where we were this time last year, with perhaps a bit more upbeat now in that they are nothing actually happening and with no decision- beginning to rise, but they are still down year-on- making and with this rabbit caught in the headlights year. There are one or two case studies that I could impression from some very senior bankers working also give you with regard to individuals. What in Scotland. What the EFG has done is remove the solicitors are beginning to find—two in particular in excuse not to lend because it is helping people to my experience—is where mortgages in principle look to recapitalise. It has given them that guarantee have been issued by banks, and that is just an oVer to underwrite some loans. I do have some case and the person does meet the criteria, and then at the studies which were published last week, which I sent last minute withdrawing them, putting the person in to the Clerks, in which I mention the EFG and what a fairly invidious position sometimes. This is that has allowed firms to do.1 Most people would rebounding as well on solicitors. Another situation is accept that there were a couple of issues around that people are trying to develop their business. One implementation, but that is partly because there was client—and I do have their permission to explain pressure coming from our side to get it done as this—approached one of the banks four months ago quickly as possible. I appreciate that the time from it to obtain funding to carry out a small-scale being announced and the first report in November, development. They had never had any debt with that to be delivered at the beginning of January, in particular bank, and four months later, after they government terms is pretty slight, but in terms of had started the work on the basis that they had been small business people who are working on a week- given a fairly broad nod that it would be okay, they to-week, month-to-month basis, they say, “Where is were told that they were getting no support, so they it?” There was a pressure from us to get this done as have had to resort to private funding to source the quickly as possible and I think that everyone accepts costs. Another client has advised me that he has been that there were some rough edges on it when it came charged double charges on arrangement fees and 4% in, but they were worked oV and I think the budget above base, rather than 2% as would have been the has been delivered. norm before the crisis. This seems to be echoing throughout the profession. My colleague Stewart Sheddon in his notes has been looking at people who Q456 Chairman: Mr Banski, from your point of have been customers of banks for some considerable view, from your clients’ point of view what is the time having to re-finance with other banks or impact on the profession? organisations. It is rebounding as well upon the Mr Banski: I think that the Society has taken a more profession. We have suVered some big employment proactive than reactive approach to this. There has losses within the legal profession but I am pleased to undoubtedly been a hit on the business and in the say I think that the Society has been extremely submissions there is a clear reduction in income of proactive in the protection, wherever they can, of the firms from this time last year. The Cost of Time their members and also trying to broker our liaison Survey is showing a reduction on a median figure of for the public as well. about 30% and that is quite an impact, and there is no doubt that there have been some cases of unemployment. However, the Society is trying to Q457 Chairman: Colin, could you tell us what your encourage the members to adopt a commonsense position at the FSB is doing to help your members in approach to the running of their businesses. They are diYcult circumstances? giving guidance on their websites and issuing Mr Borland: It falls under two broad headings in bulletins. The Society is consciously engaging with terms of the direct support that we provide to our the banks in an eVort to try to provide the proper members. We have lodged a financial advice tools to assist the members. The Professional helpline, which is eVectively a brokerage service Practice Committee, for example, is resuming which gives people advisers to get in touch with who contact on a regular basis with the banks; oYcials can help them, but also, crucially, to make sure that are making contact with the banks with bases in you are ready to make that application and that it is Edinburgh and Scotland. On another issue, to try to not going to be rejected and thus make it more keep the ball rolling for those who are in a less diYcult if you have to reapply. We also have a free fortunate position within the profession, advice is legal advice helpline for people who are having being given as to the redundancy situation. The diYculties in getting paid or where maybe they have Society is continuing to provide continuing not been paid and so they need legal advice. We also professional development for its members, even if provide things like a free financial health check to they are out of employment, to try to ensure that members. We are not credit brokers but we do deals they are kept abreast of developments. We publish whereby we can purchase in bulk or do deals with jobs on the website when they are available and we service providers to provide services at discounted are trying to find, perhaps more importantly, places rates to our members; for example, to make it for trainees—there is a big hit on trainees. So there cheaper to take credit card payments. Those sorts of is continuing support coming in December in having things on a day-to-day basis are the sort of practical what is called the third High Street Conference. help that we provide for the members. The second However, on a more general note with regards to our front of that is that the FSB is obviously an duty to the public, we have seen a decline in property organisation that lobbies for the interests of small businesses and that is still a core function. I have 1 Not printed. mentioned the EFG and we lobbied for them. The Processed: 12-03-2010 18:52:05 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Colin Borland and Mr Norman Banski most welcome change is to the HMRC2 flexible lift up the phone and call, and I think that that helps payments system. We lobbied hard on late payment, as well, and for them to say, “Let us get to the heart which again causes completely unnecessary cash of the matter here and find out exactly where the flow problems for perfectly good businesses. We areas of dispute are.” An interesting point, if you will have asked the public sector to take a lead in this and forgive me, a side point to that, south of the border have been, from our point of view, specifically we have the Financial Intermediary Scheme. The lobbying Scottish public bodies in Scotland and the Financial Intermediary Scheme does exactly that; it Scottish Executive and Scottish Parliament, with the gets in between the lender and the borrower and specific focus on subcontractors because there is no finds which points are an issue and then tries to come point in the public body paying the large prime to some arrangement. On both sides there will be contractor within ten working days—which is great, versions of the truth being presented, and let us get and absolutely has to be welcomed—if that it sorted out—that is one aspect of what it does. This subcontractor then holds on to the money and the is something that we have actually extended in small subcontractors are paid when it suits him. The Scotland because we think it will be a valuable thing other point I should mention is that we are also to do and exactly what we are describing. lobbying over the dominance of the two big banks, RBS and Lloyds Bank in Scotland now as well, and that is another issue where we have some serious Q463 Mr Davidson: You mentioned earlier about concerns about the extent to which there is a choice small businesses having problems of access to and of competition operating on that SME banking the cost of money and you also mentioned about the market. lack of competition. Is one of the banks worse than the other one? Mr Borland: I would not like to back one bank over Q458 Lindsay Roy: It is quite clear that the FSB is a another. In terms of the lending rates, they tend to self-help organisation and you are trying to be have access to information to which we do not have proactive. To what extent have you had success or to access. What I would say is that interestingly, talking what extent have you had to engage with about the Financial Intermediary Scheme, the other government and local government in trying to put aspects of what that does is that it provides some sort plans into place to address the problems? How much of reporting function. It does look at the moment, success have you had yourselves as opposed to south of the border, at other problems with bringing in a higher authority, as it were? particular lenders—their problems with particular Mr Borland: You mean in terms of lobbying success? sectors of the economy from all areas of the country—and it tries to find patterns and then Q459 Lindsay Roy: In terms of issues with banks. reports that back. The problem we have is to get Mr Borland: In terms of issues with banks we have a those members reporting back who can talk to us if branch and regional structure whereby our members there is a problem or to ask people to participate and can go straight to the regional organiser and the give an example. regional organiser will take that case and they will make their representations directly to banks. We have developed, I would say, quite good Q464 Mr Davidson: I understand that, but do you relationships with the banks in terms of helping have any impressions then? If you cannot give us people. categorical evidence, is there from your anecdotal evidence any particular evidence that you have a Q460 Lindsay Roy: Have you had a high degree of sector of the economy or one lender or regions of the success? country? Is it uniformly not particularly good or are Mr Borland: It varies. I think in some cases we have there bright spots and poor spots? been able to do something and they have looked Mr Borland: There is no doubt that people, for back and said, “Yes, we will look at this again,” and example who are in manufacturing, find things Y in other cases they have set their face against it and di cult; but whether or not that is the fault of the said no. bank versus the general state of the economy and the general state of the manufacturing sector, I am not in a position to say. I think that there is a genuine Q461 Lindsay Roy: When you have gone for external lack of information about what the true picture is support has that brought an added dimension to out there. We tend not to break our information help, or not? down sector by sector. Beyond that, I think you are Mr Borland: In terms of? right; we do need to access that sort of information quickly and have it on an impartial basis, so that we Q462 Lindsay Roy: Government, for example; the can access that information, rather than on the basis Treasury? of what we are getting and what the banks are giving Mr Borland: I think if we are seen as being active in in terms of their lending figures. The truth is the debate and arguing for members on the Scottish probably in the middle of it somewhere. stage or on a UK stage, if you have the FSB representing you and the FSB in your corner then people may think about it just a little bit more. Also Q465 Lindsay Roy: Both RBS and the Lloyds the fact is that we have the contacts that people can Banking Group have said that they have increased the amount of lending available to viable businesses. 2 Her Majesty’s Revenue and Customs Is that generally your experience? 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Mr Borland: I would make two points in response. Q468 Mr McGovern: I suppose the point I am First of all, you have to remember that the lending trying to get to—and I hope you will indulge me base has contracted. If you sat still you would here, Chairman—is, is that a misleading statement, expect the lending rates to go up. I do not think to say, “We have increased the amount of money that we are going to get to the heart of this issue we are lending to viable businesses.”? simply relying on what business organisation Mr Borland: I have no doubt that it is probably surveys tell us and what bank lending surveys tell factually correct. us. We need to get to the heart of the issue impartially. I accept that I am not an impartial observer in this; I am arguing a particular point. Q469 Mr McGovern: I know, but is it misleading? Neither, I have to accept, are the banks impartial Is it designed to make the public think that they observers, so that is why we would like something are actually lending more money per se? like the Financial Intermediary Scheme to report Mr Borland: It depends on the intention, does it back on this quickly. not? I suppose that that would be for them to answer rather than me. What I can say is that the money which is being lent is on less advantageous Q466 Mr McGovern: The question that Colin has terms and on terms on which people may prefer not just answered about RBS and Lloyds, they have to take that money and perhaps rely on their own said that they have increased lending to viable savings or money from elsewhere; or, indeed, not businesses. I do not know if viability is an exact to do the business. science, but I would be surprised if they said they were minded to lend to businesses that were not viable. So is that a rather blase´ statement? If a Q470 Lindsay Roy: We have received some business is viable they will increase the lending but evidence, both as a Committee and as individual overall they will probably decrease the lending to MPs in the recent past, presenting a picture of businesses? arbitrary and significant increases in fees for Mr Borland: I would not be surprised if they go up finance applications and renewals. Is that still the because there are fewer players in the market. case and, if so, how big a problem is it? However, you are absolutely right; the question is Mr Banski: The anecdotal evidence which we have viability and what is meant by viability. One of the is, yes, there are certainly increased fees. My issues a couple of weeks ago was that they were colleague in his submission has clearly stated that saying that they will not refuse a viable lending the risk profile had not altered, but the terms on proposition from any business. Who in the business which they were asked to renew were substantially of banking would? Who would turn round and say, diVerent and less advantageous. I have had clients “No, I am not going to lend to a business because in the same scenario. At a relatively early stage the I will make money on it and I am going to get a Society was warning their members to be aware of return on my investment”? this, that there may be diVerent constraints put upon the firms when it came to renewal and that basically they should ensure that the belt and Q467 Mr McGovern: And the converse is true. braces were there so that their facility was Banks will not lend to a business that is not viable. properly renewed. Mr Borland: Precisely, and we have never argued that they should be throwing good money after bad. I think that the crux of this issue comes down Q471 Chairman: The businesses in my constituency to what you regard as a viable business. The tell me that the overall burden on the businesses has evidence which has come back to us is that they are increased rather than decreased because this base being risk averse. Or at least they may be taking a rate is now 0.5%; because they are charging in terms risk but they are hedging against it by lending at a of a commitment fee, if they were charging them prohibitive rate. One of the points they will make 0.1% or they were charging 1%. Is this your is that they are not going to meet their lending experience? That is a question to both. targets and they cannot give the money away Mr Borland: Yes, is the short answer. Interest rates because there is no demand for it. But that is are lower but people do not see those being possibly because they are packaging the money in reflected in the price that they are paying on the the wrong way—not so much that they are not finance. If the purpose of having low interest rates making it available; they say, “Yes, of course it is is economic stimulus then that is not going to feed available but it is available on terms that you do through because the business has no more money not find attractive; it is available on terms where in the business because it is going to go into the we are going to secure it on your house and it is bank. However, you are absolutely right, the whole not going to be flexible—we are going to have a question is about the arrangement fees, the re- fixed repayable loan and not an overdraft, for arrangement fees, the service charges and if you example.” They are hedging the risk. So it is rather want to take business by credit card they want large like selling bottles of fresh air for £20. You cannot deposits to cover bad payments, and where before complain and it is not the public’s fault that they that had maybe been £1,000 a year it is now will not buy it; it is the fact that the product on £10,000 on a turnover of about £250,000 in credit oVer is not what people want. I think that is the card sales—increases of that magnitude. It is not issue. simply the lending figure we need to look at. Processed: 12-03-2010 18:52:05 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Colin Borland and Mr Norman Banski

Mr Banski: We are seeing the situation where I think that out of all the measures this is the one historically, particularly with secured lending, about which we have had the most positive businesses have been able to arrange overdrafts of feedback. base plus 2% and base plus 2.5%, but they are now looking at base plus 4%, which is substantially 3 higher, where there is no change in situations. That is Q474 Mr McGovern: Schemes such as PACE, to try where the legal businesses seem to be getting charged and get people who are made redundant back into work, with your members or clients do you have a perhaps £17.50 in eVect to renew a security which is perception that the Government has concentrated already secured and no diVerence to the risk or more on getting people back into work than saving scenario whatsoever. Going back again to my the businesses that currently employ them? colleague’s submissions, it is clear that they felt that Mr Borland: I think that is a point that came out in this was just not a step that they were willing to take a report that we published last Thursday regarding and they refinanced completely. I think that we as a the scale of job losses in small businesses and the profession are trying to provide the pastoral care to government support that is available. Traditionally the members to try to help the firms to sustain their people saw it as they are there to help a large viability because on top of everything else if legal employer; one large employer on the one site with a businesses are aVected it does aVect the public to large number of job losses. Actually I think it was in have access to legal services and access to justice. So Mr Devine’s constituency. Is it appropriate at the it is quite a wide eVect that it can have upon the moment? It has been re-defined and the FSB is a general public and in terms of the Act we do have a member of the PACE partnership, which is looking duty to the public to try to help. at how we make sure that small and medium-sized companies get access to that help. The second point Q472 Lindsay Roy: Is there a perception that banks about PACE is in terms of when it intervenes. The are trying to build up their reserves on the back of report we published last week does identify that this hike? Is that how people feel that they are being there is a need for earlier intervention because it is penalised? too late for PACE to come in as soon as it is the final Mr Borland: I think that is exactly how people feel. nail in the coYn or mitigating the damage or moving I think the phrase that is used is that, “They are people on to somewhere else, rather than actually rebuilding their own balance sheets at the expense of assisting them to focus that support on the business mine.” Whether that is true or not, that is the itself, to see how can we avoid job losses, how can we V perception. ameliorate the e ect of this, how can we tell you how we can get you back to work. There is a question that the report brings up—and it is an interesting one and Q473 Mr McGovern: A question for both really. Do I am not entirely sure of half the answers, and you feel that Government measures to date, such as something I think it would have to be debated—as the Small Business Finance Scheme, are having an to whether or not that would be a role for PACE or impact in helping your members and clients get whether it would be the role of another business through the crisis? If so, which measures are working support function. At the moment I think it would and which would you feel are perhaps not working? maybe sit neater with something like Business Mr Borland: The Enterprise Finance Guarantee is Gateway than PACE, but I am not wedded to the certainly something that was needed at the time to idea; I think it is something that we could debate and get lending moving and it was something that we in actually work out how it happens. The point remains the FSB had called for. Curiously one of the things that we do need that intervention earlier if we are that really made a diVerence—and I do not know going to keep these companies and these skills in the how much it cost, I do not imagine that it was Scottish economy. particularly expensive in government terms—was the flexible payments system from HMRC. That is Q475 Mr McGovern: On the same point, an the sort of thing that was a very sensible practical observation on my own experience of PACE has measure because we had people lying awake at night been restricted to fairly large-scale redundancies in thinking, “How am I going to pay my VAT bill Dundee in places like NCR. If the employers, because that is what is coming up and if I miss it I whether large or small, are critical of PACE in as am going to be in trouble; I am going to be paying a much as they are supporting the people that are penalty.I have a big customer who owes me and I am made redundant rather than the business, my waiting for a big cheque from this big customer and experience is that that is because PACE will only get I do not know what I am going to do. I need to go told after the redundancy announcement has been and extend my overdraft as I do in other situations, made—they are never brought in until after the but I cannot do that because it is going to cost me a announcement has been made. So, regardless of fortune to do it.” What that allowed people to do whether it is PACE or other Government schemes, was to speak to HMRC and actually explain the recent research into job losses, I believe published by diYculties in the business, and the HMRC would the Federation of Small Businesses, suggested a come to the decision, “No, we are not propping up a take-up of programmes run by,for example, Scottish bad business here; we are going to get our money Enterprise and the Business Gateway was more than back because you pay interest on it. We are going to get our money back, and this makes sense to do it.” 3 Partnership Action for Continuing Employment Processed: 12-03-2010 18:52:05 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Colin Borland and Mr Norman Banski anticipated. Are small businesses in Scotland aware providing financial assistance and information. The of the help and advice available to them, bearing in bank managers that I have known knew if you were mind what I have just said about PACE as well? viable; they would give you a kick to do something. Mr Borland: I think it is fair to say that there is a gap. We were not faced with the anonymity that we are The small business community by definition is faced with now. I think that is what we, as a Society, diverse; it is spread out and it is diYcult to are trying to do for our members; we are trying to communicate with. There is a job to be done there to bridge that gap, we are trying to get in there and let them know exactly what support is there. We can show people that it is not all doom and gloom and do as much as we can—and we are the largest that there are solutions and we need to get around business organisation in Scotland with probably those solutions and show them to people. I do not 1,000 members, but there are 270,000 enterprises in know if there is some general website, some Scotland. We do have to think seriously about how advertising or something like that which could be we get the message out and to make sure that they done through the general aspect, but people are are aware. We can do as much as we can. Our simply unaware of what is out there to help them. We members are probably a little better educated than have seen some quite substantial redundancies, even most because we work hard to make sure that our in Aberdeen, which is relatively safe from such like, members are aware of the support that is there and and you will have seen them in Dundee as well in the know how to access it; but for those who are outwith legal profession. We are not sacrosanct in so far as that I think it is a very valid point about how we being hit with these problems, but I think we are actually get that to them. trying to head them oV if we can; we are not trying to shut the door after the horse has bolted. We are Q476 Mr McGovern: On that same point, when you lucky in that respect because we are doing things, we say that there is a serious job of work to do and we are trying to keep trainees in employment; we are have to be more eVective, do you have any providing maybe 55 trainees who were struggling suggestions as to how that can be improved? and 36 have been reemployed. It is a diYcult solution Mr Borland: I think the first place we have to start is generally speaking. One thing, if I can just go back to find out where small businesses—not necessarily to what you were asking about government FSB members—in general turn for information and intervention, what is helping, certainly in so far as advice. If you have a problem where do you go and the public and house sales are concerned, is the look? Do you talk to your lawyer because lawyers stamp duty situation currently increased to always come top of the list (and I am not saying that £175,000. As a Society we would like to see it because I am sitting next to one!) of people that they extended if we could, which would give a kick-start, trust? Or accountants? because the entrepreneurs, the builders, the developers are hitting a problem at the moment and Q477 Mr McGovern: Surprisingly enough! the first time buyers are finding it diYcult to get into Mr Borland: And bank managers come further the market; and an extra 1% on a £125,000 house is down than that. We need to find out where people get a lot for a young couple to find. that information. We are doing something at the moment. Nothing has been signed and agreed yet, but there is a piece of work that we are in the process Q479 Mr Devine: You have talked about that you of trying to commission and finance, which will have been around with three or four recessions. Are answer exactly these questions. It is not just both your organisations supportive of the impressions of business support, questions about Government’s policies in all areas, and we have read PACE and questions about finance; it is across the today about the recapitalisation in banks and the board how you do that communications job. money that went into Scottish banks would clearly not have been aVordable if it was independent; and Q478 Mr McGovern: Do you have any suggestions we have another strategy that says we should not be on information about what help is available to be getting involved, we should be stepping back, as more eVectively dispersed? what happened in the early 1980s is that the Mr Banski: In our case we are very lucky that we Government stepped out of any involvement and let have, in eVect, a closed membership and we can the markets decide. Are you comfortable, both your disseminate it through the job losses and so forth. I organisations, with the thrust of the Government’s think there has to be a way that even we as a policies in all these areas at the moment? profession can probably help, as Mr Borland says. Mr Borland: We have welcomed the Government One thing that I have noticed—and this is possibly intervention in terms of recapitalising the banks and the fourth crisis and perhaps the worst recession I their most recent announcement as well. The have seen in my years of practice—is that what we prospect of what could have happened and how are missing this time around is a level of input from close we were to the brink—some of the information the banks which was provided by the old fashioned we heard yesterday shows just how close we were to managers, who knew people and who were able to the brink. This is a serious situation but how much assess; who would know if Mr Borland was a risk or worse could it have been if that action had not been not, or if he was viable or not. And he would say to taken? It had to be taken at that time. Knowing what him, “I will give you 70%. I will not give you 80% but I know, I do not see that they had a choice. I think I will give you 70%.” That is what is missing. I get the question now is: we are where we are and how do the feeling that we have this grass roots problem in we move forward? Processed: 12-03-2010 18:52:05 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Colin Borland and Mr Norman Banski

Q480 Mr Devine: So that is a yes? about whom. Mr Davidson raised the point about Mr Borland: What the Government has done in identifying trends, about identifying particular terms of stabilising the situation and introducing sectors of the market, particular lenders, particular measures such as the EFG and the HMRC are all sectors of the economy, areas of the country, and measures that the FSB agrees with. types of finance. With all these things we need to Mr Banski: My personal view is— have some sort of pattern and we need to get that information because at the moment what we do not have is any sort of impartial clarity on it. The best Q481 Mr Devine: You are not here as a person! that we can do is to tell you what is happening on the Mr Banski: I would say that the profession would ground floor membership, and we have figures from support that something had to be done. There was the banks which can be interpreted in a number of clearly a gaping hole which everybody was going to diVerent ways. We really need to get some clarity and fall into had there not been some move made. I think get it quickly. that the measures were essential from that point of view. Touching on something else that was mentioned before—and this is reinforcing what Q484 Chairman: The Royal Bank of Scotland has Colin said—the Revenue have proved to be very recently launched a second opinion hotline which is helpful at this time which—and I do not want to be open to any business refused funding. Although it too blase´ about it—is very helpful. has only just been introduced have you had any feedback? Is it having a good impact on businesses? Mr Borland: I have not had any feedback from Q482 Mr Devine: So all the policy initiatives that the members who have used it; no one has contacted me Government has taken, by and large both your and said that they would. But, to be fair, people organisations support? would only phone me to contact me if they had used Mr Borland: I think the one we would maybe quarrel it and it had gone wrong. I suppose like MPs, we are with would be the VAT cut. I think the timing was contacted with complaints more than with stories of unfortunate because it came in just before Christmas success. In principle the initiative that RBS has and you remember walking down Sauchiehall Street introduced is something that we supported and we and Princes Street and seeing 30%, 40%, 50% oV in retailers. So for your high volume low margin went on record at the time as backing it. However, business it has not had much of an eVect. There is with the caveat that RBS is not exactly a also an administrative cost when you have to go and disinterested player; and also that it performs one recalculate your prices and there are other questions half of the corporate mediator function in terms of about when you have bought things at a certain rate getting to the heart of the matter, which is very and sell them at another rate, and because the VAT important, it does not do across the board reporting rate had been at 17.5% for so long people had functions, which, as I explained, we think are forgotten about it. We would say that that has not extremely important. been as eVective as we would have liked. Q485 Mr Devine: Both RBS and Unite the Union Q483 Chairman: The FSB has previously suggested have expressed concern about the impact of mergers that there ought to be a corporate mediator to solve upon banking competition in Scotland. At this early problems and the facility for dialogue in the banking stage does your organisation have any views on the and business community. Do you think that impact of it? Any ideas about potential job losses? Scotland needs to have its own Financial And what do you think about the EU’s Competition Intermediary Scheme to help small businesses Commissioner’s decision that the banks should sell applying for finance? oV parts of their business? Mr Borland: Yes, absolutely. It is something we have Mr Borland: As we have stated, we have some quite argued for for some time. The idea of the corporate serious concerns about the consolidation of the mediator was suggested by the FSB on a UK basis small business banking market into the hands of two and was then implemented in the shape of the very big players. The best that we have in terms of Financial Intermediary Scheme, which makes authoritative data on it is the Scottish Executive’s slightly diVerent points but all the main points are study from July 2009, and it stated that 75% of the there. As I think I have said in earlier answers to Mr small business banking market in Scotland is in the Roy and Mr Davidson, it is not just about getting in hands of either RBS or the new Lloyds Banking between the lender and the borrower and getting to Group. Speaking to people anecdotally, both of the heart of the matter, getting it sorted out quickly them talk about having about 40%. The other point and moving on because if something is not a viable about the Scottish Executive report is that it was proposition we need to know. Fine, we are not going done over a year—the preceding year, which was an to object to that. If there is a technicality holding it exceptional year, so therefore we have to bear that in up or there is over-cautiousness holding it up, again mind when we are looking at some of the figures in we need to know. The second function of such a it. So, yes, we have eVectively a market for people financial intermediary would be the reporting where the choice that a lot of them see that they have function—to report back to Government. In our is take it or leave it. So what could we do to introduce case it would be the Scottish Government or more competition into the market? What has come Westminster—we are not particularly concerned through from the EU and what was announced the Processed: 12-03-2010 18:52:05 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Colin Borland and Mr Norman Banski other week, as I understand it makes sense because there is a fall in the number of training contracts. this is about getting bits of the bank to new entrants That is the downside. However, there are green who then take over that branch network. Some of shoots. the suggestions that have been reported in the press were that some players would have to lose a certain Q487 Mr McGovern: Gentlemen, apart from percentage of small business customers and our banking itself, other sectors, such as construction initial reaction to that was: where are they going to and property have been particularly badly hit as a go? So the fact that this is encouraging new players consequence of the banking crisis. In fact recently we into the market is to be welcomed. I saw some press as a Committee visited Ireland and I think it is fair reports at the weekend about some large American to say that it was the Republic of Ireland’s heavy banks that have not been touched by the credit dependence on the construction industry that has led crunch that are looking to come in and, again, that to the recession hitting them probably harder than it would be welcome. What stops people eVectively has the rest of the UK. What has been the impact of entering the small business banking market is the this on your members and clients in terms of lack of a branch network because our members— construction and property? despite what people tell you that everything is done Mr Banski: I think that there has been a substantial on the Internet or everything is done on the phone eVect. A lot of solicitors firms, especially in the last now—like to go and talk to someone. Mr Banski 20 years or so, have hung their hat on the estate made the point that they like to go and talk to the agency peg and for people in the construction bank manager who knows them, who knows the industry I think it is fair to say that most of the business, who knows the economy and all the rest of redundancies have come in the sector of those firms it, and apart from anything else it gets you a better dealing with that particular field, where the lending decision; it is less risky and the money goes downturn in the construction sector has clearly to the right people. So that branch network is impacted upon our members. It is perhaps an area important. That is why new entrants to the market which could be looked at, where assistance could be find it diYcult because it is very expensive to set up given to both the construction industry and the first a branch market. If you have a network there ready time buyers. There is a recent scheme introduced in to go then that would make sense. The other point I Scotland, whereby the Government is producing a would quickly make is that, as you know, along with percentage loan up to, I think, a maximum of 30% to the CWU4 and others, we are a member of the Post assist first-time buyers who fit the aVordable housing Bank Coalition, which has been arguing for the criteria. It is a big area which could be addressed and creation of a coalition. The best branch network in which might kick-start the construction sector. Scotland at the moment is the 1,400 post oYces that we have. I know that there have been questions Q488 Mr McGovern: Do you feel that construction raised about the cost of it but the data that we got and property are possibly the worst hit sectors, apart from our members is that 38% of small businesses from banking itself? would switch to Post Bank tomorrow if they could, Mr Banski: I think they are very badly hit, yes; if they oVered the full range of banking services. 30% absolutely. People want more houses but people of that small business banking market is a significant cannot buy them and the construction industry can market and if you cannot make a profit from that only absorb so many unsold properties and the then something is wrong. profession has to look at that.

Q489 Mr McGovern: You mentioned about Q486 Chairman: What assessment have you made of government help. Am I right in assuming that you the eVect of the banking crisis on jobs in Scotland? mean Scottish Executive help? Are there any positive signs to report? Mr Banski: Sorry, Scottish Executive help. Mr Banski: I think that from the point of view of the Society we have seen an increase in the opening of Q490 Mr McGovern: Obviously we are members of small firms as a result of the crisis. People who are the UK Parliament and is there anything of which being made redundant are perhaps taking the step of you are aware that you feel the UK Parliament could opening their own business—however, often with do to help? Prior to becoming the Scottish Executive their own funding. The statistics are showing—the the SNP promised every first-time buyer a £2,000 latest figures which we have are that practising endowment and that has never ever happened and it certificates are 10,304 compared to 10,089, so there is not likely to happen now. But there are other is an uptake there. The Solicitors’ roll has increased measures we might introduce to help business, and is by 350 roughly, and the firm closures since there something that the UK Government could do November 2008 were 30 but 38 have opened. So it is of which you are aware? heading in the right direction. Going back to the Mr Banski: If they were able to look at the aVordable redundancies, 291 members were made redundant market, yes, in some way, in the provision of grant since May 2008 and unfortunately only 41 found aid perhaps, or secured lending. It seems that the employment. Trainees—55 were made redundant schemes which are out there are to eVectively provide since May 2008 and 26 have resumed training; and a deposit which is secured and there is no risk to the authority, whether it be the local authority or the 4 Communication Workers’ Union government or the Scottish Executive. Processed: 12-03-2010 18:52:05 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Colin Borland and Mr Norman Banski

Q491 Mr Devine: One of the problems is that the Q494 Chairman: Can I thank the witnesses for their property market has collapsed, and we are building attendance. Before I declare the meeting closed, far too many houses per year, and we are sitting on would you like to say anything in conclusion, about three years of housing. How many houses do perhaps on areas we have not covered in our we need to build in Scotland each year to stand still? questions? Mr Banski: Aberdeen is talking about 12,000—not Mr Banski: Can I just thank you for inviting us to be every year but 12,000 within the next 15 years, I witnesses. The Law Society of Scotland would wish think it is. to be proactive in assisting the public. We do not want to lose sight of the fact that we are here to assist the public as well as our profession. We are not Q492 Mr Devine: Would you be able to get those exclusively after the protection of lawyers. figures? Mr Borland: Can I just echo that and thank you for Mr Banski: Yes. the opportunity to contribute. If there are any issues that you want more information on or for us to follow up with you, we will be more than happy to Q493 Mr Devine: It would be helpful if we could get do so. Get in touch with us and, again, if you do have what we need to stand still, what we have been issues that come through your constituency post bag building for the last maybe four or five years and and you think “That doesn’t sound right,” we are what is happening at the moment. more than happy to assist in any way we can. Mr Banski: We will get those figures and submit Chairman: Thank you once again for your them to you. attendance.

Witnesses: Mr Keith Dryburgh, Social Policy OYcer, and Miss Vida Gow, Money Advice Coordinator, Citizens Advice Scotland, gave evidence.

Q495 Chairman: Good afternoon and welcome. Can debt clients seek your advice on? One in particular you please introduce yourselves for the record? that I am interested in is this one from the West of Miss Gow: Hello. My name is Vida Gow and I am Scotland, where basically they were getting phone the Money Advice Coordinator at Citizens Advice calls all the time, morning, noon and night, silent Scotland. calls as well, which the individuals concerned Mr Dryburgh: My name is Keith Dryburgh and I am thought were from the bank. Is that correct? the Social Policy OYcer also at Citizens Advice Mr Dryburgh: It is certainly an issue we have had Scotland. reported in anecdotes which suggest it is possibly on the increase. We have heard of quite a few clients Q496 Chairman: What is your general impression of who get silent calls, basically because the banks are the way banks and other lenders in Scotland have putting out calls but the person on the other side of reacted to the banking crisis and recession? In your the line does not have time to pick up, which is view, have lenders been acting more responsibly in obviously quite worrying for the client if they do not the past year? know who the call is from and they have traced it Mr Dryburgh: I think from the point of view of our back and it has come from the bank. clients, sir, who are generally low-income, quite Miss Gow: Away from the silent calls, a phone call vulnerable consumers, we are seeing the same sort of is their main way of trying to come to some sort of problems that we have seen for a number of years agreement with the clients, and they will make now in terms of irresponsible lending, the bank numerous calls to the client. So even though the charges issue of course, and aggressive debt client may have already spoken to a money adviser collection practices, and generally their attitudes to and been told that they should advise the bank that people who are falling into arrears and financial we are dealing with it on their behalf and that they problems. will be getting a financial statement, they will still get Miss Gow: I do not know if “responsible” is the daily phone calls asking when the payment is going word. They have withdrawn a lot of the personal to be made, when is it going to start. lending that they were doing. People are not getting Mr Dryburgh: The worry is that it is almost the same access to loans. Whether that is to do with circumventing the advice process. If you happen to being responsible or not is questionable. have a Citizens Advice Bureau adviser representing you and somebody calls you at home, you do not Q497 Chairman: They are not lending big sums of have the back-up and advice there, and they can money because they cannot borrow from the banks. pressure you into making an agreement that you Miss Gow: People certainly are not getting the same possibly would not have done if you had gone access to credit. Indeed, they are not getting access through the adviser. to bank accounts in many cases. Q499 Mr Davidson: Can I ask about the phone calls? Q498 Mr Devine: You have given us some case My understanding is that quite a lot of these calls are studies of particular problems faced by the Bureau’s coming from foreign call centres, and the people debt clients. Which is the most common issue that involved are not in a position to actually discuss the Processed: 12-03-2010 18:52:05 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Keith Dryburgh and Miss Vida Gow individual case. They simply say they will refer it on around that. Certainly, with the mainstream lenders, to somebody else. I have had a number of the mainstream banks, that does not seem to be so constituents raising this with me. Language much of an issue, but we are definitely seeing a more diYculties have been a particular problem. Is that aggressive collection almost with other, non- something that has come up a great deal with secured lending. yourselves? Mr Dryburgh: I am not sure it has. Miss Gow: It is not something that I have certainly Q504 Lindsay Roy: With double, triple demands for come across. repayment over a shorter period of time? Mr Dryburgh: It is sometimes an issue that diVerent Miss Gow: Yes. One of the examples we have given in here was somebody that was being asked to pay so departments do not really speak to each other. You V may have made an agreement with one department, much more than they could a ord to pay. then you get a call from another department who do not know anything about an agreement having been Q505 Lindsay Roy: How have you taken that made. We do have problems with departments not forward, given that many people would view that as speaking to each other. unacceptable practice? Have you been able to lobby on behalf of the people who come to you? Have you Q500 Mr Devine: We did a report on credit unions, been able to use government agencies to support you and we did one on poverty as well. We got the feeling in that? that basically, the banks were cutting a lot of people Mr Dryburgh: In some circumstances, the OYce of out; they did not want them as customers. They did Fair Trading is the main agency, and we are in not want to touch them because they were only contact with them, especially to do with credit and putting £200 in on a Thursday and £195 of it was out irresponsible lending and so on. I think it is a on a Friday. Is that your experience and is that more constant battle for us to lobby on this issue as well. of a problem at the moment? Miss Gow: The main thing is to get the client to come Miss Gow: Yes, access to bank accounts is certainly back to us if they are asked to pay more, so that if we becoming more and more of an issue that we are have provided income and expenditure, come to an coming across. With more people having to apply for agreement for payment, if the bank then try and bankruptcy, there are only two banks we are aware increase that at some point later on, the client knows of, Barclays and the Co-op Bank, which will allow to come back to us so that we can ensure it is a an undischarged bankrupt to have an account with reasonable payment that is being made. them. For people who are employed, who have a wage that they need to pay into a bank account, it Q506 Lindsay Roy: Are you able to build up a then becomes a huge issue for them that they cannot database on which to challenge the banks? access these banking facilities, because their bank Miss Gow: The banks have agreed to adhere to accounts are immediately closed down by the other certain figures of expenditure. If they receive a banks. financial statement of income and expenditure that shows that the client is within those limits of Q501 Mr Devine: We have your figures from last expenditure, through the British Banking year, which show 360,836 encounters, which is a 14% Association they have agreed to those payments. increase on the previous year. Can you send us the That is how we would normally go back to them and figures for the last five years? say, “You have agreed to those figures and now you Mr Dryburgh: We can. We know that generally,there are saying you won’t accept it.” Generally, when it has been an upward trend in terms of the number of goes to somebody slightly higher up the chain, they debt clients and in terms of the amount of debt they will accept it. have come to us with. We did a report earlier this year called Drowning in Debt, in-detail reports of our debt clients, and we found that their average debt Q507 Lindsay Roy: So it is whether they are was over £20,000, which was an increase of 50% in operating within or not within criteria. If they are just the last five years. not, you pursue it further? Miss Gow: Yes, absolutely. Q502 Mr Devine: Can you also break that down to which part of Scotland? Q508 Mr McGovern: Could you tell us what you Mr Dryburgh: We have constituency debt profiles think of the existing measures announced by the UK that we have just produced for MSPs. We break that Government and the Scottish Executive to help down into constituency profiles for MPs as well. customers of banks and if you have an opinion on whether or not you think they have helped in the Q503 Lindsay Roy: To what extent have banks been ways that they were intended to help. more willing recently to accommodate revised Mr Dryburgh: We have talked a bit about repayment plans and avoid calling in loans or repossession and the Government’s Home Owner repossessing homes compared to two or three years Mortgage Support Scheme has had some impact on ago? this. It has led to banks showing a little bit more Miss Gow: The repossession of homes seems to be a forbearance on repossessions. As you will have seen, slightly diVerent thing. There definitely does seem to the Council of Mortgage Lenders have been taking be more lender forbearance that is happening down their estimate of the number of repossessions Processed: 12-03-2010 18:52:05 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Keith Dryburgh and Miss Vida Gow this year. There is some worry though that it is just bureaux. It is not because they are not trying hard; it stretching out the process. I have heard in some is because there are just so many people. We are of places the repossession process can take up to 18 course worried about how, when the funding is months now. That is not unusual. I am just worried reduced, we are going to meet these extra people, that the repossessions are just being spread out. In because they are still going to be there next year. terms of repossessions, government policy has certainly had some impact. We are of the opinion on other aspects of credit and banking that there has Q513 Mr Devine: Where are the areas with six or been maybe a lack of focus on the consumer seven weeks waiting? interests. A lot of work has been done on the stability Miss Gow: It is in all kinds of pockets across of financial systems but not enough focus on the Scotland. It is all over, right from the north of experience of the customer within the system. Scotland down to the south.

Q509 Mr McGovern: Could I just clarify: when you Q514 Mr Devine: Could you give us that say government, you mean the UK Government or information as well? It would be helpful to know the the Scottish Executive? length of time people are waiting. Mr Dryburgh: Yes, the UK Government. Miss Gow: Various agencies have tried to bring in methods to reduce it, to try and see clients more Q510 Chairman: In your view, what do you think quickly,but it is just the sheer numbers of them at the lenders should be doing to help those who are in moment. mortgage diYculties? Mr Dryburgh: It is about, as you say, being Q515 Mr Davidson: Could I just clarify to what responsible. A lot of banks say that when somebody extent you think that the very intensive work that is in financial trouble, they will talk to them and try you do sometimes with clients actually contributes to get them out of it but our experience is that people to the length of the queues. Clearly, the more work get into financial trouble, they get a bank charge of you do with an individual client, the fewer clients £25, they cannot pay, then they get another bank you will be able to get through. Is it not possible to charge and another bank charge, and before they consider providing a more basic service for a larger know it they have hundreds of pounds worth of bank number? charges on their overdraft. I think banks need to look at the circumstances and income of the Miss Gow: We have introduced a new system called customer and assess whether they really can repay Cash Flow, which is a joint project between the these charges and, if they can, work out a repayment advice industry and also the financial industry, schedule for them to get back into the black rather which is to give that initial assistance to clients, to go than just adding on these compound interest and over their financial statement with them, to discuss charges. It is not taking into account the person’s all their options, and if the chosen option of the circumstances. client is to be making payments to their creditors, they would then take that forward and do all the paperwork themselves from that point onwards. Q511 Chairman: What more, in your view, could the Obviously, that is for those clients who feel able to UK Government do to take people out of this Y deal. The problem is that often, by the time clients di cult time? come to us, their health has suVered terribly because Miss Gow: I would like to see certainly the banks of the situation that they are in, and they feel very being encouraged, shall we say, to open more basic unable to deal. bank accounts for people, not to discriminate against people who have been made bankrupt. With the bankruptcy procedure, people have come to a Q516 Mr Davidson: I understand that. I am not conclusion they have reached a level of debt that unsympathetic to that position. The diYculty is that they cannot sustain so they need to be able to draw clients’ health will continue to deteriorate if your a line under it, but to be able to start afresh they need service is rationed by queuing and people are being to have that bank account, they need to be able to get held for an interminable time. I know in my into working a bank account on a proper basis, often constituency there are people who will turn up for the first time in years. It would be good if there regularly to try and be seen on a particular day and could be work done to encourage the banks to open are not seen. You can just imagine how that builds more accounts for people to have access to. up, and the fact that you seem as well to have a queuing system by which it deals with people on the Q512 Chairman: Will you be able to provide the day, and at a certain time no more will be seen, the current level of service to debt clients after the incentive then is to turn up at the crack of dawn. You government funding package comes to an end in can see how that pattern develops anxiety amongst March 2010? people. Surely there must be ways of managing the Mr Dryburgh: We have seen a significant increase in system other than the one you have at the moment. the number of people coming to the service since the Miss Gow: As I say, diVerent bureaux have brought recession started, and we have been able to broadly in all kinds of arrangements. The extra money that meet that through the government funding that we came in has allowed a number of bureaux to extend have received, but we still hear of waiting lists for their hours, to have extra staV on, to put in telephone money advice of six or seven weeks in certain access to systems. There has been across all bureaux Processed: 12-03-2010 18:52:05 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Keith Dryburgh and Miss Vida Gow diVerent initiatives as such to find ways to queue- charges existed. When they are charged for bust, to try and help people as soon as possible. Yes, insuYcient funds or unpaid items, people do not it is an awful situation that people cannot access know what they are being charged for. the service. Mr Dryburgh: One of the eVects of the recession has been that it is not just increasing numbers; it is the Q524 Lindsay Roy: So there are big communication increasing complexity of the issues that people bring. issues with clients? Often people have employment, housing, and debt Mr Dryburgh: I think so, and transparency as well. problem all rolled into one. It takes a lot of time to Lindsay Roy: That is something we might want to go through that. They may have to claim benefits as pick up on. well. A lot of people come in a crisis situation. You see people who come and say, “I am getting my Q525 Chairman: I can understand that your clients house repossessed next week. What do I do?” Those are not the small, medium or big businesses. They people need the help on the day. It is diYcult for the have their issues which they have raised with us, bureaux to work through all these complex cases. charging excessive overdraft interest rates, renewal fees and commitment fees, but my understanding is, Q517 Lindsay Roy: Over the last few months, as talking to my constituents, that the banks and MPs individually and as a Committee, we have building societies and these financial institutions are received concerns about arbitrary and significant exploiting the most vulnerable in our communities. increases in fees for financial applications and They are charging them very high interest rates, and renewals. Is that a pattern you are still finding? Is it in some cases, if they go over their limit by £5, or diminishing? What is the current picture? even £2.50, the clients end up losing £50–£100. They Miss Gow: Is that renewals of loan facilities? write one letter, they charge £25, then they have penalty charges. What do you do with these clients who feel the banks are unreasonable, in fact ruthless, Q518 Lindsay Roy: Yes, loans for small businesses, with these people? What are you advising these fees for financial applications and renewals? clients? Miss Gow: It is not something that we tend to see Miss Gow: Generally, at that point, we are saying to much in the personal debt, which is the majority of the clients that really, the relationship with that bank our client base. Although we see certainly after the has broken down, and we would be suggesting to the fact, if things go wrong, that clients end up with very client that if they have income that is paid into their large amounts of charges, there does not tend to be bank account, they should be looking at opening a for clients the kinds of fees that you see going to diVerent bank account, and then we would sort out small businesses. their debt with their bank separately. If they do not do that—and this is where it comes that it is the most Q519 Lindsay Roy: In terms of bank charges and vulnerable people—people’s benefits go in and it is fees, have you any indication that it is still arbitrary all swallowed up in charges, so they find themselves rather than a consistent set of criteria that are with no money to live on. being applied? Miss Gow: I would have said it is very consistent; it Y is very high consistently. There does not seem to be Q526 Chairman: The di culty is, unfortunately, any kind of discussion with the banks at all on the nobody is there to defend those people from the amount. banks and the financial institutions. I tried to introduce a private Member’s bill to prevent excessive charges by the banks. I suggested that if Q520 Lindsay Roy: Is it a dictatorial regime? somebody goes over their overdraft limit, the money Miss Gow: It is. If you have a cheque returned, it will that person should be charged should not be more be £35, and no matter what reason it happened, there than 2.5% of the excess amount, and the courts is no discussion. That is how much, and if the clients should be given some degree of power so that if go into the branch and try to discuss it, they are told, clients feel they are being treated unfairly, they can “No, that is how it will be. That is how much is challenge those decisions in a court of law. What is charged.” your view of this? How can we stop these banks exploiting the most vulnerable in our communities? Q521 Lindsay Roy: So it is being done to people, not What can we do? with people. Miss Gow: There was the case this morning, and we Miss Gow: Yes. have seen on bank charges the OFT have tried to challenge it and they have been told that they do not have the right to challenge the bank charges as Q522 Lindsay Roy: There is little dialogue? unfair. So we are now back at stalemate, because the Miss Gow: Absolutely. banks have total control. Whilst they are your banker and that is where your money is being paid Q523 Lindsay Roy: It is perhaps perceived as into, they have total control over what they do with arbitrary. “Why is it that figure as opposed to . . . ?” your money. As I say, clients are more and more Mr Dryburgh: Yes, and consumers have a real lack having to go to other banks, to credit unions, of awareness of charges. 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Ev 80 Scottish Affairs Committee: Evidence

25 November 2009 Mr Keith Dryburgh and Miss Vida Gow

Q527 Chairman: Can you tell us, with your Mr Dryburgh: The banks are always something we experience, whether clients of CAB in England have try to lobby on, especially on things like bank the same kinds of problems that you experience in charges. In terms of bank charges, all the diVerent Scotland? fees for cheques bouncing, overdraft infringements, Miss Gow: Certainly. unpaid items, it all comes under the same kind of thing. We think it is all unfair and irresponsible. We Q528 Chairman: Are the banks in England or do work with the banks continually to try and tell London better natured than in Scotland? them our problems and to try to work out solutions Miss Gow: I am not hearing anything to suggest it is with them. any diVerent. Mr Dryburgh: According to our colleagues, they Q534 Mr Davidson: One of the things I wanted to have very similar issues, often with the same banks. pursue with you at the very beginning was not just the question of irresponsible lending but there is also Q529 Mr Devine: Is there any bank that behaves irresponsible borrowing. A number of people have worse than another, or are they all the same? got themselves into the position they are in now as a Mr Dryburgh: I think it is across the board. I think result of being greedy and so on, and not running some banks are slightly better than others on some their accounts in the way they ought. What I am things and slightly worse on others. Banks tend to trying to separate out in my own mind is the extent follow each other. If one bank does well on one to which the bank charges are justifiable as a charge thing, on another they do worse. They often follow on people who are behaving irresponsibly and to each other. what extent they are simply taking advantage of people who are in financial diYculties. They Q530 Mr Davidson: You mentioned earlier on that presumably have a defence. Their defence the Co-op and Barclays were doing one thing presumably is that “people do business with us, they particularly well. Have either of those banks a good know the terms, they decide to go over, it is only fair record generally or was that just an aberration? that our costs should be met, otherwise the burden Miss Gow: It is purely from the point of view that falls on people who are running their accounts they have said that they will open bank accounts for properly.” I am just interested in exploring with you undischarged bankrupts. As to the rest of their what the response to that ought to be. banking, I could not comment. Mr Dryburgh: I think with overdraft charges there should be a sting in the tail if you go too close to zero. Q531 Mr Davidson: You do not have a league table They should bounce you back up, but they are so of bad banks? punitive and disproportionate to people’s incomes Miss Gow: No. To be honest, it is pretty much across that they keep people in overdraft. So it is not that the board that we see the problems. people continually go into them; it is that they cannot get out of it at all. They get one charge and Q532 Mr Davidson: Given that the case was lost suddenly they owe hundreds of pounds. These today, have you thought about suggesting a set of should be in proportion so that people can learn rules for banks which they should be following in from their mistake and get back out and know not response to the fact that they get huge amounts of to go back in. They are so punitive that people are money from the government, from the public purse, getting stuck in them. and that there should be rules of engagement, so to speak? Given that there is almost a duopoly in Q535 Mr Davidson: Do you have a shopping list of personal banking in Scotland in particular, items that you have been going to the banks with, something like that could be introduced in the public saying “These are the things that we would like to interest. Have you explored any of that? change”? Mr Dryburgh: Certainly that would be great. It is Mr Dryburgh: Yes. maybe not for us to tell them what to do. It would be diYcult. Q536 Mr Davidson: I think it would be helpful if you let us have that. Presumably your shopping list is in Q533 Mr Davidson: If not you, then who? You are an order, and that would give us an indication of the dealing with things at the sharp end. I get some cases significance of the individual items compared one to and individual MPs will get some cases, but you are the other. dealing with this systematically. I do not know really Miss Gow: Certainly. I would say at the end of the whether or not the additional charge for bouncing a day I know the banks talk about irresponsible cheque as compared to the charge for going over borrowers but they were the professionals and they your overdraft limit, which is the most significant were the ones who lent the money. The idea that the issue and which is the one upon which we ought to poor bankers were done over by the public is—The be placing the greatest pressure on the banks. I public have found themselves, for one small would have thought that, even as a start, you mistake—you maybe go to the cash machine, you perhaps ought to have a look at whether or not there take out £10, you forget that you have a standing is a particular set of things that you would want order due which puts your account overdrawn by a government to pick up as part of the deal with the few pence, you suddenly are hit by a £35 charge, they banks as part of their social responsibility. You have then hit you with £28 at the end of the month—there not done any of that? are not many people’s wages can sustain that level of Processed: 12-03-2010 18:52:05 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG4

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25 November 2009 Mr Keith Dryburgh and Miss Vida Gow charges. All it takes is one incident like that and it banks have the right, if you have an account with becomes a whole knock-on and spirals out of control them and you also have a loan or some kind of for the client and before they know it, there are credit, and you fall into arrears on your credit, they thousands of pounds of charges. can take the money that is in your personal account Mr Davidson: Give us a list. or savings account to put towards the payment of the loan. Often this happens when people have been Q537 Chairman: It would be helpful to the paid their wages or their benefits, and they just take Committee, if you feel that what the banks are doing all that money, leaving the person with absolutely no is wrong and you have suggestions as to how they money to live on. This is something that we are quite can improve themselves, if you could drop a note to concerned about because it can leave people the Clerk to the Committee. Can I thank the witnesses for their attendance this afternoon. Before destitute until they receive their next income. I I declare the meeting closed, do you want to say understand there could be a right to do that but they anything in conclusion, perhaps on areas we have should be leaving a certain amount of money in not covered in our questions? people’s accounts so they can get by. Mr Dryburgh: Just one more thing. We have Mr Davidson: Put that on the shopping list. experienced a rise in the number of cases of Chairman: Thank you very much for your something called the right of set-oV. Basically the attendance. Processed: 12-03-2010 18:53:03 Page Layout: COENEW [SE] PPSysB Job: 439642 Unit: PAG5

Ev 82 Scottish Affairs Committee: Evidence

Wednesday 2 December 2009

Members present: Mr Mohammad Sarwar, in the Chair

Mr Alistair Carmichael Lindsay Roy Mr Ian Davidson Mr Charles Walker Mr Jim Devine Mr Ben Wallace David Mundell Pete Wishart

Witnesses: Mr Stephen Boyd, Assistant Secretary, Scottish Trades Union Congress, Mr Rob MacGregor, National OYcer, Finance and Legal Sector, Unite, and Ms Wendy Dunsmore, National Secretary, Unite, gave evidence.

Q538 Chairman: Good afternoon and welcome. You that that 10% figure would be realised. It is certainly all gave evidence to us on the banking crisis earlier something I hope we do not achieve, I hope there is this year in March; I would like to welcome you a turnaround in the fortunes of the industry, but at again to today’s evidence session. Perhaps you could the moment given the number of announcements we introduce yourselves for the record. have had and also the scale of those specific Mr Boyd: Stephen Boyd, I am Assistant Secretary of announcements, there is a very real danger that that the Scottish TUC. lower end figure, which is considerable in itself, will Mr MacGregor: I am Rob MacGregor, I am the be realised within a relatively short space of time National OYcer of the Finance and Legal Sector over the next few years. at Unite. Ms Dunsmore: I am Wendy Dunsmore, National Q542 Chairman: Is 10% your maximum? Secretary for Unite the Union and have the Lloyds Mr MacGregor: With respect, Chairman, we are not Banking Group portfolio. putting a maximum figure on it. What we were aware of at the time was that there were concerns about the Q539 Chairman: Mr MacGregor, when you gave potential for restructuring. We do not propose to evidence to us last time you told us that your fear revise any particular forecast; what we are working was that there would be a contraction in with is the announcements that we have from the employment in the banking sector in the United employers that we deal with and to date within the Kingdom of anywhere between 10% and 30%? Have sector as a whole, just for those companies that your fears been realised? Unite represents across the UK as a whole, the figure Mr MacGregor: Not in total. Certainly if we look at is around about 38,000 job losses in total. There is a the total number of people who are employed in the very real possibility that over the next few years finance sector across the UK, which is anywhere similar announcements of a similar scale could be between 1.1 and 1.3 million then, no, we have not made and so the figure of around about potentially seen that level of contraction. Having said that, the 10% of that original total figure of 1.3 million could number of job loss announcements that we have had actually be realised. and also the scale of those announcements, certainly since we gave evidence to you in March earlier this year have been considerable, and we are only at the Q543 Chairman: If you compare the figures for very early stages as far as we are aware of a number Scotland with figures for England what is your view, of the employers’ plans for their reorganisation and how hard has the financial and banking sector been restructure of the business. So whilst those fears have hit in Scotland? not been realised yet, there is still the potential for Mr MacGregor: It has had a substantial impact on further consolidation and contraction in the employment within the Scottish finance sector as a industry over the next few years. whole. There is no definitive figure on job losses but in terms of the total announcements of jobs that Q540 Chairman: Based on your prediction of have actually gone in 2009 and those we are aware between 10% and 30% are you on the bottom side at will go in 2010 from the announcements that a 10% or nearer 30%? In terms of the percentage what number of employers have made, we estimate that is your view? there will be a net reduction of around about 5,000 Mr MacGregor: It is far too early to say generally roles, primarily in the banking sector in Scotland. So speaking. some of those will have already gone, but also within that figure are announcements for job losses that will take place primarily in 2010. Q541 Chairman: 30% is very high. Mr MacGregor: If 30% was realised then we are talking about 330,000 plus job losses in finance, but Q544 Mr Carmichael: Does that figure for job losses we are hopeful that that will not be the case. take into account the anticipated losses that there However, it would not be beyond the bounds of will be as a result of the closure of Lloyds TSB and possibility that if the scale of contraction that we NatWest high street branches. have seen in 2009 is repeated over the next few years, Mr MacGregor: In terms of the closure of them? Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Boyd, Mr Rob MacGregor and Ms Wendy Dunsmore

Q545 Mr Carmichael: Yes, or the selling oV of them. thought management would have a role to try and Mr MacGregor: No it does not. We have expressed reduce these levels of anxiety and stress. Has that concern about what the impact on employment will been happening, has there been good be for the break-up of the banks but in terms of communication and consultation with the bank specific job loss announcements attached to those representatives? restructuring plans, from the employers certainly Mr MacGregor: Dealing with the last aspect, in there has not been any. terms of the reorganisation and the management of the restructuring and the job losses, then the Q546 Mr Carmichael: Have you any idea what the employers meet their obligations under either their likely consequences of those sell-oVs will be? statutory obligations to consult or their obligations Mr MacGregor: If you look at the number of under any collective agreements they have with the branches, certainly within the Lloyds Banking trade union, but to be perfectly blunt that is not Group, that needs to be divested as a result of the exactly hard, it is not very diYcult for them to meet discussions with the European Union and you also those obligations. Having said that the general look at the Royal Bank of Scotland plans for the morale—I know this is a somewhat sweeping break-up of their organisation—not just the branch generalisation—amongst people who work within closures but also the sell-oV or the attempted sell-oV the finance sector and the banking sectors of the insurance division—a rude calculation would particularly, and then again within those banks that be that around about 25,000 workers are directly are subject to state support, has been at a aVected by that announcement. considerably low ebb for quite some time and we do not see any particular evidence of the employers Q547 Mr Carmichael: That is within the group, that being able to do a great deal to lift that level of is not in Scotland. morale and that sense of anxiety that exists Mr MacGregor: No, that is not in Scotland, that amongst workers. would be across the piece as a whole but obviously of all the parts of the businesses that are being sold oV there is a significant presence in Scotland. We are Q550 Lindsay Roy: Do you think it is partly because not saying that 25,000 jobs are going to be lost, we there has not been a dramatic culture change and are saying that 25,000 staV are materially aVected they are still very much a performance and target and potentially at risk as a result of the planned driven organisation with fewer staV involved? break-up of these institutions. Mr MacGregor: There has been absolutely no material change to the culture within most of these Q548 Mr Carmichael: The form of words that we institutions, particularly within the retail banking V keep hearing used is ‘keeping compulsory sector. Sta are still required to sell the same type of redundancies to a minimum’. What do you products to the same level, they are still performance understand that minimum to be at the moment and managed within these organisations. This is not just how realistic do you think it is for the banks to keep to achieve bonus payments, this is simply to achieve to it? your performance standard, and we have to deal Mr MacGregor: It is, I have to say, a standard phrase with far too many cases of individuals who are being that employers use. Our view is that it is not beyond essentially performance managed out of the the wit of these organisations to avoid compulsory organisation, not because they commit acts of wilful redundancies full stop. Perhaps it may be, in an misconduct but because they fail to sell suYcient absolute sense, very diYcult but on the whole if we products to customers. This is despite the fact that look at the technical diVerences between people who we are in the middle of an economic recession, it is volunteer for redundancies and those who are despite the fact that consumers are being much more literally forced out, who are sacked, then the eVect cautious now about the type of financial products has been to seek to minimise the number of that they are taking out, but there is still this drive on compulsory redundancies. We would qualify those the part of the employers to push retail financial comments with the fact that a number of people who services products to the public and use their frontline do exit the organisation under voluntary terms, to staV, some of their lowest paid staV, to deliver put it simply, jump before they are pushed because those sales. there is little prospect of alternative or indeed suitable alternative employment as a result of these restructures. But in a strict sense, looking at the Q551 Lindsay Roy: This is anecdotal but is it the case technical diVerences between what are compulsories that there is a three-month and in one case a six-week and what are voluntaries, then yes, given the scale of period to manage people out of the system if they are the announcements we have had and the number of not matching up? jobs that have actually been lost, there has been a Mr MacGregor: It varies across companies but in the minimal number but still many people in a minimal case of the Royal Bank of Scotland there is a number of compulsory redundancies. standard mechanism in place whereby you can performance manage somebody out within 12 Q549 Lindsay Roy: At our last meeting it was weeks, so from the initial point at which somebody reported that there were increasing levels of anxiety is identified as failing to meet their sales target for and stress amongst the workforce who were argument’s sake, it could be 12 weeks from the start becoming demoralised by events and I would have of that process to them being out of the business. 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2 December 2009 Mr Stephen Boyd, Mr Rob MacGregor and Ms Wendy Dunsmore

Q552 Lindsay Roy: Has that time been decreased going through a change because they have got so during the recession, that time gap? many sites, and it is not just across Scotland, they try Mr MacGregor: No. Since the financial crisis in and do the voluntary severance road before they go some of the institutions, despite the drop-oV in down the compulsory redundancy road, so with any demand for financial services, the targets have been particular announcement they cannot really say maintained. In some cases the targets have actually what areas it is going to impact. We know the sites it been increased despite this fall-oV in demand and the is going to impact but we do not know what it is determination of those on the part of the employer going to be at each site. That is the diYculty. If you to manage those people who do not meet those sales look at the divestment situation that is the Royal performance targets out of the business is Bank we do not know what company is going to buy undiminished. the bits that have been divested so until we know what their infrastructure looks like we do not know Q553 Lindsay Roy: Can you tell me if the targets are how many more jobs could be at risk with that discussed with staV or are they imposed—done to because an awful lot of the support, IT et cetera,if people? the companies have that already it is going to have Mr MacGregor: It is unilaterally imposed by the an impact in ICT and all the rest of it. It is 25,000 that management. we know direct but we do not know what the indirect impact of the divestment is going to be. Q554 Lindsay Roy: Rather than done with people. Mr MacGregor: Some people do push back but there Q559 Mr Devine: It will be either compulsory are no collective arrangements for the management redundancy, early retirement, given a package or of target regimes. performance issues. Mr MacGregor: The performance management Q555 Lindsay Roy: That must be a major concern issues are distinct and separate from the restructures. for you. The employer’s phrase will be ‘business as usual; Mr MacGregor: It is a very major concern for us; it is disciplinaries and managing people out of the a major concern for the people who are directly and organisation’ but it goes back to the point that materially impacted by those regimes. We had hoped Wendy made about the number of compulsories and that as part of the cultural change that needs to take we said it earlier, that 7% figure for RBS and 3.5% place within retail banking, that that would be a figure for the Lloyds Banking Group we believe measure that the employers would, if you like, soften minimises the position because there are a lot of their stance on, but there has been no change people where it is quite clear from certainly the whatsoever. discussions we have had with members who do take the view that there is frankly no future for me within Q556 Mr Devine: Can I just ask about the number of this organisation as a result of this restructure, job losses? You were talking about 25,000; in normal therefore I will volunteer for redundancy. As far as circumstances proportionally that would mean the company is concerned a volunteer is a volunteer V 2,500 for Scotland but because of the extra is a volunteer, we take a somewhat di erent view. investment there was in the financial sector in Scotland I am assuming that that figure is higher Q560 Mr Davidson: Can just clarify the level at than 2,500. Can you give me an indication of what it which people are leaving the organisation? Is it those is and can you let us know, of that figure how many who are responsible for getting us into this mess or is have actually been made compulsorily redundant? it overwhelmingly the poor bloody infantry that are Mr MacGregor: In terms of the 25,000 that relates to being disposed of? those jobs potentially at risk as a result of the break- Mr MacGregor: It is the classic lions led by donkeys; up of those institutions. I am afraid I do not have the the donkeys are still around but a lot of the lions details but I will obviously find out and write to the have gone. It is the people who have the indirect Committee with details of the impact that that will responsibility for the financial crisis who pay with have in Scotland. In terms of the specific number of their jobs. Obviously there have been one or two compulsory redundancies in Scotland, again I do high profile casualties amongst the senior executives not think we have a specific figure for the industry as of certainly both Royal Bank of Scotland and a whole, but we will certainly find that figure out and Lloyds Banking Group but by and large many of we will write to the Committee with that those who are culpable for the financial crisis within information. those particular institutions—and of course there are many others elsewhere—from where we sit are Q557 Mr Devine: Are we talking about tens or what? still very much in post and enjoying the fruits of What is the oYcial negotiating figure? their labours. Mr MacGregor: We are talking hundreds of people. Q561 Mr Davidson: Can I just clarify the terms Q558 Mr Devine: Is this throughout the UK? under which people are going; are they particularly Mr MacGregor: No, within Scotland. generous or could they be characterised as Ms Dunsmore: In the Royal Bank there is 7% particularly mean? compulsory redundancies they are saying. Within Mr MacGregor: They are modest, I would not have Lloyds Banking Group it is between 3% and 5% characterised them as either generous or mean, they dependent, but the diYculty is that when they are are modest. Wendy will cover the terms of Lloyds Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Boyd, Mr Rob MacGregor and Ms Wendy Dunsmore but in terms of the Royal Bank it is about three and the bonuses are and staV who are now on £13,000 to a half weeks for each year of service. Given the fact £17,000 are being targeted as fat cat bankers, and that the average employee in RBS has got probably that is not what they are. six years or less service, and if you are in one of the more populous grades which is, if you like, the Q564 Mr Devine: Can you send us a copy of what the equivalent of the cashiers or clerks, so that is earning targets are. If we get that we will understand what around £13,000 to £14,000, so that is your annual somebody has to do and then if they do it what salary on which that is based and you have got would their bonus be. around about six years service, it is the maths of Ms Dunsmore: Sure. what that brings in terms of a redundancy payment and that is your lot. Q565 Chairman: Lloyds Banking Group has announced job losses of approximately 1,000. Do Q562 Mr Davidson: Can I just come back to the you believe that in all the rest of the financial sector point that you were making to Lindsay Roy about will lose 4,000 jobs—you say a total of 5,000? the drop in demand for financial services and the Mr MacGregor: On the basis of the information that targets being maintained and in some cases we have been provided with by the employers in increased. I understand it has been suggested that terms of their current plans, that is jobs that will go there are league tables for staV, can you just clarify in 2009 and jobs that they are earmarking for going if that is in fact the case? in 2010—there may be some spillover in subsequent Ms Dunsmore: Yes, there are league tables for staV years but this is broadly speaking—our to hit targets and it is a shame and humiliation way understanding is that the total number that we are of motivating staV to sell more. What we are getting aware of for Scotland represents around about 5,000 more evidence of now is that staV are actually taking FTE which is full time equivalent positions. It is an products out themselves so they do not hit that important qualification because full time equivalent bottom 20% to be performance managed out of the includes a lot of people who will be working part business, so staV are taking on the products so that time, so although it is 5,000 FTE in terms of they hit their targets. The performance management individuals it could be considerably more than that processes within the banking sector, although the if you allow for part time employees as well. processes have been there before, are now being used quite harshly. What people are seeing now is that Q566 Chairman: Do you think anything can be done people are being performance managed out of the to avoid these job losses, what more could the business whereas before it was if you were not very banks do? good, but it is used more now so they are actually Mr MacGregor: They could stop it for a start, they taking out products that they do not need themselves could put an absolute moratorium on it, I just do not so that they can actually have job security. think they are going to. The situation is that in terms of those two companies particularly, in terms of the Lloyds Banking Group and the Royal Bank of Q563 Mr Davidson: That is very helpful. Can I just Scotland, in terms of some of their internal clarify in terms of bonuses to these staV because structures they are so determined to reduce their before there was a suggestion that there were really overall costs that there appears to be, certainly from quite generous bonus arrangements for top staV but the discussions we have had with them, absolutely we should not cut all bonuses because quite a lot of no appetite for slowing down. They are going to the lowly paid were getting bonuses. Is that press ahead with their restructuring plans and continuing to be the case that these staV will be certainly from the discussions also that we have had eligible for modest bonuses or are bonuses tending to with the Treasury and certainly UKFI1 that message go down for those on the frontline? comes across loud and clear, that these job losses will Ms Dunsmore: Bonuses are discretionary so it can be be implemented and that the businesses will be a bit hit and miss whether they get it and it depends significantly restructured. From where we sit we on how you are rated against your peers. You can hit never saw either Royal Bank or Lloyds being every target that you have got in some cases but if particularly over-staVed; certainly our impression your peer does better then you lose out because you was that they were always very productive, they were are being performance managed. It is a bizarre always targeted to keep staYng numbers to a situation where you can hit or exceed your target but minimum so we did not see if you like any fat in the you will still find yourself performance managed, so organisation that could be trimmed, but obviously the bonus structure is discretionary. People do rely the new management regime that occupies certainly on it and if you are on, as Rob said, £13,000 or the Royal Bank of Scotland believes that they have £14,000 a year, you have a chance of getting a 2%, to drag down staV numbers even further. 3% or 5% bonus you are really aiming for that to help you through Christmas, credit cards or Q567 Chairman: Is there proper and adequate whatever that you have to get. We are trying to say consultation with the trade unions by these banks? now that it is a fair day’s pay and get away from the Mr MacGregor: There is certainly a proper bad publicity of bonuses because bonuses are really consultation programme but whether it is adequate tarred now and will never recover and staV do not or not is questionable. The employers meet their have any confidence in it now because of that. They do see that the higher up the grades you go the bigger 1 UK Financial Investments Ltd Processed: 12-03-2010 18:53:03 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Boyd, Mr Rob MacGregor and Ms Wendy Dunsmore statutoryobligationstoconsultandtheycomplywith Q570 Mr Devine: The relocation of Lloyds from what the terms of the collective agreement but again those you call Buckinghamshire up to Edinburgh, I have particular standards are not very high. It is a process got a letter from Lloyds this week telling basically that they have to go through to ensure that they have they are closing one part up in Livingstone and they defendable positions ultimately in the event that are potentially seeing 70 jobs go but they are basically people claim unfair dismissal, but as far as opening another part where they will create 110 jobs. responding to the overtures of the trade union In my personal view that is obviously gaining around representatives to try and mitigate some of the worst 40 jobs. eVects of their closure programmes we have to say Ms Dunsmore: We would say that one of the things that we do not get a lot of mileage out of these that we have been trying to do is make the companies employers. be a bit more creative and not look at each of the Ms Dunsmore: Also you could be really cynical and business areas as a silo andsay there are the job losses. say that when an employer is having massive job One of the things we have been pushing is that if you losses it is a time that they want to engage the trade are going to come out of a site potentially what are unionsothatthetradeuniondoesalotoftheworkfor you going to put in its place to retain the jobs. The them. That is what they do and it ends up that people unions have been quite successful in a number of are trying to manage the staV’s expectations and those cases. Do not get me wrong, there have been trying to help the staV to get through a really diYcult cases where they have been really unsuccessful but if a situation, and certainly that is what has happened. If company is downsizing we are trying to make the you look at all the banks in Scotland, that is what we company be as creative as possible and challenging are doing, we are spending an awful lot of time them in an awful lot of the closures or the change helping staV to get around the situation that the programmesthattheyaregoingthroughtomakesure banks have put individuals in. that the change programme is not a knee jerk reaction, it is something for the future to be built on Q568 Mr Davidson: It has been suggested to us by and not just about head counts and job losses and Stephen Hester that the unions have a constructive saving money. working relationship with RBS; is that your view? Chairman: The new management structures at the Mr MacGregor: Wehave a working relationship with Royal Bank of Scotland and Lloyds Banking RBS, I would not put it any more strongly than that. Group—Lindsay. We understand that Stephen Hester has inherited an organisationwhichwas inconsiderabletrouble,there Q571LindsayRoy:BeforeIcome tothatcanIpickup are just no two ways about it, and there is a another point? Scotland has had a very high determination by the new management team to put reputation for its banking sector and there are key their particular stamp on the organisation, both in people in organisations that can help enhance that terms of how it is managed and also the size of the reputation and that is something we want to achieve. organisation and how many people work there. We I put it to you that there is a real obligation on the recognise that but I would not put our relationship banks to be very good employers just now in these any warmer than that as I have said. very diYcult times. Would you agree that that is the case and are they matching up to that? Mr MacGregor: It would be surprising if we said we Q569 Mr Devine: Why is it important that the wouldnotagreewithitbut,yes,wedo.Clearlythereis headquarters of RBS and Lloyds Banking Group a responsibility on all employers within the financial remain in Scotland? services sector to restore confidence within the Mr MacGregor: It has huge symbolic value, it has industry,to restore the industry’s reputation, not just huge importance to the nation’s economy, it is a inScotlandbutelsewhere,andtheycouldcertainlydo demonstration that the Scottish financial sector, more to do that. despite the problems, remains vibrant and vital. I do not think, frankly, it is in anybody’s interests for the headquarters of either institution to be scaled down Q572 Lindsay Roy: In terms of morale. or reduced, it actually provides a benefit to the Mr MacGregor: Absolutely. I cannot recall a time economy. We fully support the decisions to do as when the morale of bank workers has been at such a much as possible and we certainly will try and do as low ebb. We have had in the past major restructuring much as we possibly can to maintain a significant exercises across many industries but even so I do not presence for both those institutions within Scotland believe we have seen it as it is now, at such a low ebb. because it is a very important part of the make-up of There is a responsibility on employers, therefore, to employment in the Scottish finance sector which, as do all that they reasonably can to restore confidence. we have said before, is a very, very important part of the Scottish economy. Q573 Lindsay Roy: What more would you like them Mr Boyd: It is important to emphasise that in to do then to restore morale and increase support to Scotland we do have a deficit of large multinational their frontline staV, who are the key people engaging organisations thatare headquarteredin Scotlandand with the consumers? we will be doing all we can to try and change that and Mr MacGregor: To recognise that those frontline advise them appropriately as to controlling things in staV are their best possible asset to restore trust, faith Scotland and having headquarter functions up there. and confidence in their industry because they are the In the past we have been far too relaxed about ones who actually deal on a day to day basis with allowing the control to be taken out of the economy. retail bank customers. They need to look long and Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Boyd, Mr Rob MacGregor and Ms Wendy Dunsmore hard at the management cultures that operate within weekend and at night-time, just to make ends meet retail banking, particularly the various performance because their salary is not as adequate as it should management practices that they have and the steps be, so they do have to get a second job but they that they could take to draw back on some of the do have to get permission for that so that there is approaches they take, particularly with the target no conflict. driven sales culture that exists in retail banking, because the best way to restore confidence amongst customers is actually to deliver financial services that Q577 Mr Carmichael: Are you seeing any impact people want and need, not the ones that the from direct Treasury involvement in the question of businesses simply think it is important to push to bonuses coming through the bank? drive up sales even further. Mr MacGregor: Apart from the decisions to impose a threshold. Q574 Lindsay Roy: There are issues of confidence in the new management structures. Are banks Q578 Mr Carmichael: Beyond that The Times is adopting the same remuneration practices to their carrying an article today indicating that the top executives as they were before, in other words is Treasury are seeking to determine, they say, the it business as usual or has there been some change? “shape and quantum” of remuneration packages. Mr MacGregor: We negotiate salaries and Is that something that has filtered through to you? remuneration packages up to a certain point so we Mr MacGregor: No, not beyond the issues are not privy to the detail of the senior surrounding the threshold. management’s reward and remuneration packages per se. Obviously we are aware—and you will be Q579 Mr Davidson: Can I just come back to the hearing from him later—because it was heavily point you made, Wendy, about staV buying publicised of the remuneration package of the new company products in order to basically retain their chief executive of the Royal Bank of Scotland but jobs. Does that apply to all the banks or only one there are other senior executives within both in particular? organisations earning considerable sums of money Ms Dunsmore: We have seen sight of that over a and many of them actually were around during the number of years now actually but it does happen financial crisis as well. We are not aware of any in all the banks; certainly in all the banks I know dramatic reductions in, if you like, the salaries of in Scotland I know of staV members who are individuals other than, obviously, the decisions having to buy products to get them out of that made recently about the caps on bonuses and the bottom 20% of sales. various thresholds that will apply. Ms Dunsmore: In addition to that the contractual bonuses and everything that goes with their Q580 Mr Davidson: We are seeing Stephen Hester package has not changed, but an awful lot of of the Royal Bank of Scotland later on today. That executives have given up their bonus as a gesture would be true of some of his employees. to show that they want the company to recover et Ms Dunsmore: I would imagine so, yes. I have to cetera, but they have given up their contractual say that I am not that close to the Royal Bank bonus for that year only, it does not mean that in employees but I would say yes. future years they will have given it up for a lifetime. Mr MacGregor: It would be not unusual for that If you are earning a very large salary it is probably approach to be adopted in RBS. easier to give up a bonus for one year to give Ms Dunsmore: It is quite usual as well to encourage confidence back in that company. your family to take out products as well, although they may not use them, like credit cards, but as long Q575 Mr Devine: It was recently publicised that the as they have got a credit card they just need to use chairman of RBS was earning something like it once and it triggers. £750,000, had 1.5 million shares and he actually became a non-executive director of some American Q581 Mr Davidson: Can I just be clear about this bank or American mining company. If you are an question of the extent to which the banks are trying V ordinary member of the sta are you allowed to to push lending onto people? In the past there has take a second job? been the crisis of people being indebted, debt Mr MacGregor: No. building up and so on, taking out credit cards and Ms Dunsmore: If you get permission. the like. Has the mood changed as it were or are Mr MacGregor: You cannot do it without the banks still trying to push credit onto people in permission and I think you would find it very the way that they were before? Has the bonus Y di cult to get that permission, frankly. structure changed at all to reflect an incentive, say, to increase savings products as distinct from Q576 Mr Devine: That would be the policy that pushing lending? applied to the workers who were basically on low Ms Dunsmore: From the experience I have got I can levels of salary, you could not take a second job, see more savings schemes and all the rest of it to but the chairman of the company can. try and bring in money to the banks but what we Ms Dunsmore: A lot of the staV do take a second find for instance is that they will push a credit card job to make ends meet and there are a lot of staV and you will get more points if they take out the who work in pubs and things like that at the insurance for the credit card. That is deemed as a Processed: 12-03-2010 18:53:03 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Boyd, Mr Rob MacGregor and Ms Wendy Dunsmore safe product, so it is not just the product itself but credit to make available to people so they are there is the insurance to support that and so there having to be more prescriptive about the type of is a lot of pushing for insurance. loans that they give out but there is still a Mr MacGregor: The emphasis is on products that determination to push financial products like will generate an income for the bank. Opening personal loans, the opening of accounts and all the savings accounts does not generate commensurate rest of it because they generate an income. income with products like insurance policies or loans so the targeting regimes that banks operate emphasise the selling of those products, products Q586 Mr Davidson: What I am just trying to such as loans or insurance, more than savings. clarify—and the question that has been put to me to raise phrases it quite well—have your members reported to you whether the banks are adopting a Q582 Mr Davidson: Leaving aside the question of more responsible attitude to lending to customers insurance for a moment, I just want to be clear now? It is that issue of a more responsible attitude about this then. The incentive structure that the that I really want to pursue with you. Would I be banks have emphasises the selling of loan products fair in saying that they are not being more rather than savings products. responsible because they are continuing to press Mr MacGregor: Absolutely. loans out and provide an incentive structure to sell loans, but the only reason that they are not pushing Q583 Mr Davidson: And that is still the same out more credit is simply because they do not have notwithstanding the crisis that we are in. the capital available to provide, and if that capital Mr MacGregor: Yes. was available they would be back to their old ways? Mr MacGregor: Yes. Q584 Mr Davidson: Fine, thank you; that is very Mr Davidson: Fine, that is really helpful as well. helpful. Thank you very much. Mr Boyd: Can I make a point on that? Last week when he was before the Scottish Parliament’s Economy Committee Stephen Hester argued that Q587 Chairman: I want to come back to this bonus culture. Do you think the restrictions on the banking sector reflects the wider economy and V eVectively you get the banking sector you deserve. discretionary bonuses are an e ective way of This represents to me a subtle but quite important moderating salaries? rewriting of history and this is a very important Mr MacGregor: It depends who it is applied to. point. Mr Hester was essentially arguing that the banks reflected the wider economy; as the economy Q588 Chairman: From top to bottom. became more indebted the banks did too et cetera, Mr MacGregor: The policy on bonuses and and to me the direction of causation that he remuneration is not constant across the described there is all back to front in that we have organisations, the employers adopt diVerent got the economy that the banks lobbied very, very approaches on pay and benefits for diVerent groups hard for. The types of incentive structures that have of workers depending on which part of the been described to you today have had more than a organisation they are operating in. The problem profound impact on the economy. that we have, particularly in retail banking—and again we are talking in generalisations—is that the Q585 Mr Davidson: As well as having that incentive base salary, the consolidated salary, has been structure I just want to be clear about the extent to systematically pegged back so that despite the which the banks are adopting what could be industry being incredibly profitable for very many described as a more responsible attitude to lending. years base salary levels are still hovering around the The argument before was that they were pushing most populous grade at the bank, the cashiers and loans to people without necessarily checking clerks who will earn £12,000 or £13,000 a year. whether or not they could aVord to pay them back People have to participate in the bonus schemes— and it was all a question of just shoving credit at they do not have any option whether they want to people. It is possible to have an incentive structure or not—they have to participate in the bonus that emphasises lending while also having tightened schemes and, as Wendy alluded to earlier, it is the terms under which that lending takes place, and simply to make ends meet, it is simply to try and I just want to be clear whether or not it is your top up those, frankly, incredibly modest base impression that they have tightened the basis for salaries so that when there is a big credit card bill individual customers in order that they are being or you have to pay your gas or electric you have more responsible when lending. something either on a quarterly basis or a yearly Ms Dunsmore: There is a tightening up of the basis to meet the requirement. Those same procedures for lending but the targets are still arrangements do not necessarily apply to other remaining the same, so there is a tightening up, parts of the banking organisation and we would there are more hoops to jump through to get a loan, submit that one of the things that has to take place you are absolutely right, but the fact is that there is a fundamental restructuring, a root and branch are loans to be had there. review, of remuneration practices across banking as Mr MacGregor: That is not because they are trying a whole to bring about in part the kind of cultural to be more responsible, it is because of the change that we believe needs to take place in this availability of credit. They do not have as much industry because without it, as colleagues have Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Boyd, Mr Rob MacGregor and Ms Wendy Dunsmore referred to earlier, when illiquidity problems are David Mundell: Just so that it is on the record the overcome when we move out of recession we will Conservatives supported the bank bail-out, let us go back to the bad old ways. be quite clear about that. Lindsay Roy: Which one? Q589 Chairman: Are you concerned that restrictions on discretionary bonuses will simply Q592 Mr Carmichael: With the benefit of hindsight, result in alternative payments such as contractually Mr MacGregor, do you think the merger of HBOS binding bonuses or increased salaries? and Lloyds was necessarily in the best interests of Mr MacGregor: It is a potential consequence; Scottish financial services? whether it will actually happen I am afraid I do not Mr MacGregor: In terms of Lloyds and HBOS; really know. that is a very, very diYcult one to answer. On the Ms Dunsmore: If you look at how the banking basis of the information that was available to us at sector works and how they do their salaries, they the time on the position that HBOS was actually do them through market pay and if they are in the takeover by Lloyds of HBOS was, frankly, comparing themselves to each other what that does the only game in town. is actually suppress the salaries. It is a sort of cartel that we are not able to negotiate with. A cartel Q593 Mr Carmichael: But if you remember the meets, they decide what the market is and then the chronology of it the Banking Rescue Fund was salaries reflect that, so there would be no sign of created before the deal was sealed. It would the cartel, no sight of it, so salaries are always certainly have saved a lot of diYculties for Lloyds, restricted. would it not? Mr MacGregor: Potentially it could have done but Q590 Chairman: To tackle this economic crisis do the problem with looking back is we do not know you believe that the Government has taken all what would have happened if the Government had necessary measures or do you think the not taken the action they did in relation to HBOS. Government could have done more? Mr MacGregor: We placed on record last time our Q594 Mr Carmichael: I am not disagreeing with the support for the actions of the UK Government in initial decision, what I am suggesting to you is that seeking to deal with the initial impact of the there was a point after that when the reconstruction financial crisis, and I have to say that remains our fund had been created when it would have been position. In terms of could they do more: yes, they possible to maintain HBOS as an independent bank could do more and we have argued very strongly— or at least the Bank of Scotland as an independent I go back to the answer I gave earlier about bank—which is what we ended up doing anyway. bringing about cultural change. There needs to be Mr MacGregor: As we have seen from the results a significant restructure of how the industry is that have been issued by the Lloyds Banking Group regulated and supervised, not just in terms of how in terms of the scale of their losses and the losses remuneration policy is set but in terms of how the that were accrued by HBOS there was a strong industry is managed, the type of products they are doubt that we would have been able to maintain allowed to sell, the performance management HBOS, first of all as a separate and private entity regimes they operate in, but also about who and, whether or not the Bank of Scotland element, regulates the industry. That again is very important. which included the commercial banking section of There have been some welcome changes, HBOS, would have been able to stand on their particularly on the board of the Financial Services own; that is stretching credibility somewhat. Authority and indeed in terms of the performance of the Financial Services Authority, there have been Q595 Mr Carmichael: I am not suggesting they some welcome changes, but we are still a long way would not have functioned without public money from the kind of change that we believe needs to but they ended up getting public money anyway, take place to avoid a repeat of the events of the last did they not? two years. Mr MacGregor: Yes, they did, but the scale of the public money might have been an issue. Q591 Chairman: If the Government had accepted the advice from our converted friends not to take Q596 Mr Carmichael: Why would it have been a any action what would have been the consequences diVerent scale? for the industry? Mr MacGregor: I do not know. The fact that Mr MacGregor: Had the Government not taken Lloyds took them over, Lloyds themselves were the actions that they did in terms of the Royal Bank able to provide support to HBOS. Had HBOS been of Scotland and what was Halifax they would have left to go it alone, I simply do not know what the faced oblivion and that would not have been possible consequences could have been for the rest contained just within those institutions, there of the industry. would have been a huge knock-on eVect elsewhere in the industry. Also, bearing in mind the size of Q597 Mr Carmichael: The problem for Lloyds was those organisations, had Royal Bank of Scotland they did not know what they were taking over, and Halifax not been able to open for business did they? back in October of last year the knock-on eVect for Mr MacGregor: That is a matter you would have the rest of the society is frankly beyond calculation. to refer to Lloyds. 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2 December 2009 Mr Stephen Boyd, Mr Rob MacGregor and Ms Wendy Dunsmore

Q598 Mr Davidson: I wonder if I can clarify the case that it was only through the collective whether or not you have a view on the situation in intervention of the UK Government that the Ireland and Iceland. We went to Ireland and are Government was able to support the Scottish going to go to Iceland and we have drawn some finance sector and it is important, whatever lessons about what happens when you have big arguments there are about the future, that people banks in small countries that fall into crisis. Are do not lose sight of that fact. there any particular observations that you would Mr Davidson: That is very helpful. want to make to us about the situation in either of those countries? Mr MacGregor: I suppose I am just grateful I am Q599 Chairman: Can I thank the witnesses for their not the union oYcer for the Irish banks and the attendance this afternoon. Before I declare the Icelandic banks, frankly. Obviously we do have meeting closed, would you like to say anything in members in Ireland and they are in a parlous state conclusion, or perhaps address any issue which we of aVairs. The position in Iceland is certainly have not raised in our questions? beyond my comprehension. Economically, they Mr MacGregor: No, thank you very much. have virtually gone back to the Middle Ages. It is Chairman: Thank you very much.

Witnesses: Mr Stephen Hester, Group Chief Executive, Royal Bank of Scotland; Mr David Thorburn, Executive Director and Chief Operating OYcer, Clydesdale Bank; and Mr Adrian Coles, Director General, Building Societies Association, gave evidence.

Q600 Chairman: Welcome to our evidence session. Mr Hester: We are grateful to have had the Good afternoon. May I ask you, please, to introduce opportunity to make a written submission and I yourselves for the record? think it will better use the Committee’s time, rather Mr Thorburn: My name is David Thorburn. I am an than me repeating that, to invite questions in the Executive Director of Clydesdale Bank plc. session itself. Mr Coles: My name is Adrian Coles and I am Director General of the Building Societies Association. Q602 Chairman: We are all concerned about job Mr Hester: Stephen Hester, Chief Executive of RBS. losses in the financial sector in Scotland and the United Kingdom. Can you tell us, what is the current picture with relation to employment in the financial Q601 Chairman: Before we ask detailed questions, and banking sector in Scotland? Who will start, first? would you like to make a short opening statement? David, I think you have done reasonably well out Mr Thorburn: Thank you, and good afternoon. of this. There has obviously been a lot of change and Mr Thorburn: Thank you, Chairman. Nonetheless, uncertainty in the banking sector in the last 18 we have had some job losses over the last 12 months. months and it has been a very testing period for Clydesdale Bank’s reduction in staV numbers has businesses and families as well. Over that period at been of the order of 460 across the UK and within Clydesdale Bank we have been focusing on two Scotland the number is 75. Going forward over the things. Firstly, to do everything we can to help our next 12 months and beyond we have no major business and personal customers get through this restructuring plans. We are always looking to make particular crisis and, secondly, quite frankly, to keep our business more eYcient, which is a necessary the bank safe. We are pleased to have been given the precondition of surviving in this marketplace, but we opportunity to attend today and expand on the have no major restructuring plans so do not written evidence that we submitted to the anticipate any step-up from those levels. Committee. I would be happy to answer any Mr Coles: In the building society sector there questions about Clydesdale Bank’s approach to certainly have been job losses, relatively small in retail and business banking throughout the UK Scotland as a proportion of the UK because the during the course of this session. Thank you. building society sector in Scotland is so small relative Mr Coles: Similarly, I would be very happy to to the rest of the UK. If you look at net mortgage answer questions on the distinctive approach that lending, for example, this year that will amount to mutual building societies have taken to the financial about £12 billion across the whole of the UK crisis. Generally, the mutuals, in my view, have compared to £100 billion or £110 billion two or three performed with less impairment than the banks over years ago. If you look at the savings market, there is the last two years, although clearly there have been virtually no growth in savings deposits this year some high profile failures, in particular in Scotland, compared to about £70 billion two or three years in the building society sector. Overall we think that ago. In those circumstances you need fewer staV to customer ownership gives building societies a arrange mortgages and to accept savings deposits, distinctive edge in the market and we very much and some building societies have been forced to hope that building societies will continue to perform reduce their staV count and every financial well over the recovery period from the current institution is under very strong pressure to reduce recession. costs at the moment. Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles

Mr Hester: As it relates to RBS specifically, so far Q606 Lindsay Roy: Can you give us some examples there have been just over 800 roles that we have of the things you have done to reassure and bolster reduced in Scotland, of which, for your interest, one- staV? Has there been a culture change, particularly seventh was by way of compulsory and six-sevenths in relation to performance targets? by way of either voluntary severance or people Mr Hester: On the topic of reassurance, as I said the moving to other jobs within the company. issues tend to descend in order of importance, if you like. First of all, is the bank even going to be there, which is about financial stability. Secondly, what will Q603 Chairman: How many job losses do you expect the future for the bank look like and how can it be during 2010 in Scotland? successful, which is about the strategy and the Mr Hester: I cannot give you a figure for that in RBS roadmap to doing that. That then cascades down because a figure does not exist. Obviously we will be from a bank level to division levels to individual happy to report on it when we have it. The way that business unit and location levels, and there are we do these things is to work with the unions and our diVerent amounts of clarity that can be given on all staV on a case-by-case basis and go through all the V of those things as you go lower down because di erent processes and so on. I cannot give you that obviously there are some issues that are in the figure, I am afraid. process of being laid out. As it relates to performance targets, the issue of performance is Q604 Chairman: You have no idea how many job obviously important all the time in business but is losses there are going to be in your organisation especially important in RBS where we have a next year? business that in some respects failed and where every Mr Hester: What I have said globally, as opposed to taxpayer in the country depends on us performing specifically in Scotland, is that I believe the biggest better in the future, so throughout the business we announcements as they relate to job losses have are looking at how staV are incentivised to try to already been made. Some of those announcements strike the right balance across the range of diVerent are still in process, however, and I would expect the behaviours that we want as a business. number of substantial announcements to dramatically fall from this point. Q607 Lindsay Roy: Is it incentivising where apparently, according to some of the trade union Q605 Lindsay Roy: We heard from the trade unions representatives, targets are still imposed and, in in the last session that there is an increase in stress other words, things are done to people and not with and anxiety levels amongst their staV and people, and they feel at a time of recession there demoralisation. A key role of management is to try needs to be that dialogue in terms of what are and reassure staV. What have you and your team realistic targets? been doing in that regard? Mr Hester: Obviously it is a big bank so I cannot Mr Hester: That is a very important point. As I have speak for every conversation that has been had also said before, if you work for RBS today in any throughout the bank, but certainly it would be my role it can feel like a very thankless job and one that goal in all conversations to which I have been part has got demerits at every corner. Our staV are to be that the goals and targets that we set as a bank and congratulated for the fortitude that they have shown at the highest level are ones that are set not just on a in continuing to serve our customers throughout all top-down basis but are part of a top-down and the diYculties of the last year, of course whilst bottom-up dialogue. acknowledging most sincerely the public support that has enabled that to happen. I would say that one of the foremost tasks we have had as management Q608 Lindsay Roy: How much evidence in terms of has been to try to make the job doable and there were quality assurance do you have to see that is actually a vast range of diVerent aspects to that. One of the happening? From some of the representatives we aspects was to try to move very quickly to secure the have spoken to that is certainly not their perception. financial future of the bank, which we could only do Mr Hester: It would probably be true that there with Government support, secondly to set out a new would not be a two-way dialogue with every single strategy for the bank and a new roadmap so that we individual, the 160,000 in our bank, as to targets that could re-engage with our staV as to how the bank are set. It would be impossible to manage the bank would get back to success and serve its customers on that basis. The dialogue would typically take well, and repay the taxpayer and become safe again. place at the diVerent managerial levels as you go Then, within those major frameworks of things, down according to which target is being set. There there has been a huge amount of communication to are, of course, very extensive management processes staV to try where we can to ease anxiety and where to try and understand if targets are not being met, or we cannot ease anxiety to at least allow people to feel even if they are being exceeded, why and how and that we are dealing with harsh realities in as what is the right reaction to that: is it the target that straightforward and fair a way as possible. There is is wrong or the tools that people are given to achieve a huge cascade of diVerent things in specific areas their targets that are wrong. Then there is a whole that we do on the people front. In the end, our range of things, for example if we are talking about business is all about people and that is why we are the branches, like mystery shopping and internal working so hard against a hostile set of audit and so on that try and get diVerent perspectives circumstances. on what is happening at the ground level. 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Ev 92 Scottish Affairs Committee: Evidence

2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles

Q609 Mr Devine: I was a former Head of Health for Q614 Mr Devine: I am saying there is not a culture Unison and the Health Service in Scotland had within your group of working positively with the about 160,000 members as well. I met with the chief trade unions. You are the Chief Executive and you executive on a weekly basis and when things were have never, ever met the lead oYcer of Unite. diYcult we would have conversations almost on a Mr Hester: I do not think I would derive one daily basis. Obviously this is a very diYcult time for statement from the other. We work extensively with your group but we just had Rob MacGregor in, who Unite. There are times when we agree and there are is the National OYcer of Unite, how many times times when we do not agree, and that is natural in all have you met him? such relationships. We have been dealing with Mr Hester: I have not. particularly diYcult issues in the last year which give rise both to some extensive positive aspects to the relationship but also some stresses in the Q610 Mr Devine: You have not? relationship, as there always are when you deliver Mr Hester: No. those diYcult judgments. As I said to you, I am completely available to meet with Unite. I am not aware that they have requested it, but if they have I Q611 Mr Devine: How can you come to this will do it forthwith. I do not think whether I have or Committee and say that you are concerned about have not met with someone personally tells you staV and you are involved with staV? We have had a anything about the level of constructive engagement whole range of issues raised by the trade unions or otherwise with any party of ours, whether a trade about performance issues that have been raised by union or other parties. I am very confident that our my colleagues, and such like, and you are telling us interaction with Unite is appropriate across a very that you have never met the National OYcer, the wide range of areas where we do interact. lead oYcer who represents your staV. Mr Hester: I could turn that both ways and say as Q615 Mr Walker: Do you think you will have to far as I am aware I have not ever been in receipt of a divest yourself of your investment banking arm at request by him to meet me. some stage in the future? It seems to me you have got a major problem there. You are in receipt of huge Q612 Mr Devine: I understand he has made a variety amounts of taxpayers’ money, but to pay and attract of requests to meet you. people to work in your investment banking arm you Mr Hester: If I was in receipt of such requests I have got to pay enormous bonuses. We have been hearing figures of £1 million to £5 million. The public would immediately say yes. In fact, in the exchange simply are not going to wear that and politicians are between these meetings I suggested to him that we not going to wear it. Do you see in the medium-term should meet and he agreed. More specifically, one of that you will probably have to get rid of your the things that was wrong at RBS was that the bank investment banking arm and really focus on retail was subject to too much central control and banking to make RBS viable in the future? micromanagement and the people who managed V Y Mr Hester: The three goals that we are working di erent parts of the bank were not su ciently towards, which we believe to be the goals that all of empowered to run their businesses. RBS is of a scale our stakeholders would have, including our majority V where each business has di erent characteristics and shareholder, and were indeed communicated to me one of the things I am trying hard to change is to say when I was asked to do this job a year ago and on that I should not be some kind of artificially many occasions since then, would be to support our important person in RBS, we need a range of customers as well as we can, to return the bank to managers who are empowered to deal with their safety and security on a standalone basis, and to business and do it properly and I should be helping rebuild the bank’s commercial success so that the them rather than micromanaging them. On most taxpayer has an opportunity to get his or her money occasions the people who are directly responsible for out at a profit, which is of interest to everyone. The the businesses and people against whom we face oV state shareholding in RBS, should it be realised at a against Unite would be the most appropriate people profit in coming years, represents an awful lot of to meet with them in the same way that I have not schools and hospitals that can be financed if that met with Unite’s counterparts in the United States, happens or will not be financed if that does not Germany or any other country. happen. Clearly it is a goal to be taken very, very seriously. In pursuit of those three goals we are working as hard as we can, both in terms of the Q613 Mr Devine: We have not interviewed them. strategy that we have constructed and in terms of Basically it is a culture of partnership working where executing that strategy. The business plan that was the trade unions, as they said earlier on, have to go put together was the best that we could come up with and present the hard decisions that you have made which had a range of ongoing businesses, one of unilaterally without any involvement with the trade which was the investment bank. We believed, and I unions and the targets being set without any believe today, that is the best way to accomplish our individual? three goals with that business mix. Of course, I have Mr Hester: If you do not mind me saying, I think often said that nothing is forever and whenever new that is something of a mischaracterisation of what circumstances arise we must look at those to see I said. whether a new reaction is important. It was Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

Scottish Affairs Committee: Evidence Ev 93

2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles interesting when we were forced by the European it may be, with that comes a level of scrutiny and Union to announce the sale of a number of our level of contradiction which is inherent in the businesses some weeks ago as part of the settlement political process. Our job, apart from getting the with European Union for state aid that the value of bank back to health and value as we have talked the taxpayers’ ownership in RBS declined by nearly about, is to try and work with the sources of political 20%, which was some £9 billion, at the idea that support to ease the process for everyone’s benefit. Of profitable businesses would be forced to be sold. course there are tensions around it, but in the bigger There is this tension between the goal of allowing the picture the support we have from Government has taxpayer to get out at a profit and other political been highly constructive, enormously beneficial and goals which may or may not make some bits of our without that we would not be around. business more or less attractive. All we can do is serve all of our shareholders and stakeholders in the Q619 Mr Carmichael: When you went into this best way that we know how. situation it was on the basis that you would retain control of the commercial decisions for the bank, Q616 Mr Walker: You seem to have an almost was it not? insurmountable problem. How are you going to sell Mr Hester: That was the basis on which I was hired, to my frontbench and to the Government the fact yes, that is right. that you need to pay bonuses of £4 million to £5 million to attract and retain the best people? If you Q620 Mr Carmichael: The question of remuneration cannot sell that and you cannot retain and attract the for staV is surely a commercial consideration? best people you are not going to have a viable part Mr Hester: Yes, it is. of the business. If you manage to square the circle you must be a genius because I think you are in a really impossible position on this. Q621 Mr Carmichael: Do you feel let down? Mr Hester: Obviously, as you know, no Mr Hester: As part of the Asset Protection Scheme, determination or even proposals have been made in in the very specific matter that you are referring to, relation to bonuses and will not be until the year has the Treasury has reserved to itself a number of rights passed and we know the results and what everyone of interference over RBS’s business which, if those else is doing. Clearly I cannot comment on any rights were misused, could interfere and could in amounts. I do think that there is a tightrope to be extremis prevent our ability to manage the bank walked on this issue and I would agree with you that commercially. However, I believe that the intent is if RBS is unable to retain and motivate staV in any not to misuse the rights, so assuming the intent part of RBS it will be very diYcult to fulfil our goal matches reality we may get through all of this in a of making the bank safe, because if you do not have sensible way. good staV you cannot have a safe bank, of serving customers, because if you do not have good staV you Q622 Mr Carmichael: You are not still feeling cannot serve customers, or of the taxpayer having bruised, are you? any chance to get their money back. You are right, Mr Hester: No. This is a job where you do get there is a very real tension in this issue against the bruised quite frequently. three goals that the Government and all of our Mr Carmichael: Welcome to our world! shareholders have given us. Q623 Mr Wallace: Mr Hester, can I just ask about Q617 Mr Carmichael: Mr Hester, is the role of the your exposure in Dubai. How big is that exposure? Treasury making it any easier for you to walk this Mr Hester: Obviously there are complexities and so tightrope? I am thinking in particular of the article on and so forth, but the total exposure that was in the business pages of The Times this morning.2 disclosed in our accounts from memory, and forgive Mr Hester: I am sorry,I am not willingly dominating me if I get this wrong and I will write to you if I do, this conversation on the panel. I apologise to my was about £2.7 billion. colleagues here. Clearly it would be very easy for me to complain about the diVerent aspects of the Q624 Mr Wallace: That is the accounts. Is it not a politicisation of banks and RBS and it is clear that bit more? many of those aspects do make our job more Mr Hester: That was the last published accounts. diYcult. Q625 Mr Wallace: It was about £5 billion, would Q618 Mr Carmichael: Do you think you have been that be right? the victim of politicisation? Mr Hester: It is probably safest if I write to you and Mr Hester: Sorry, just to let me finish. It would be make sure I know which number is which. very easy to make those complaints and to point out where politicisation does make the job we are trying to do for the taxpayer more diYcult. However, I do Q626 Mr Wallace: What accounts are you referring not and will not complain because in the bigger to? Old accounts? scheme of things RBS is the beneficiary of enormous Mr Hester: Our last published accounts. support. We have to understand, uncomfortable as Q627 Mr Wallace: Which were when? 2 ‘City showdown likely as Treasury seizes control of RBS Mr Hester: It has not gone up materially since our bonus pool’, The Times, 2 December 2009. last published accounts. I will write to you. 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Ev 94 Scottish Affairs Committee: Evidence

2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles

Q628 Mr Wallace: The reason I ask that is on one Q629 Mr Davidson: I certainly do not underestimate side you have got Clydesdale, Yorkshire, Bank of the scale of the tasks that face you, but I want to Australia, a double-A bank, four in the world are come back to the original point that was made about double-A, and Australia, did not embark on the the relationship with your employees or, as I think of exploitation and risk that RBS did in all sort of them, “voters”. The impression I have is the areas. Every time you try and get back on your feet relationship with staV is not quite as rosy as you are something comes about, something is exposed, painting. We were told earlier on by representatives whether it is an issue like Dubai and the taxpayer is of the staV here from Unite that it was not a more and more vulnerable. My honourable friend, constructive relationship they had with you, it was a Mr Walker, asked the question and you are now relationship. Anecdotally, a number of us have had trapped between a rock and a hard place. Your reports from individual constituents about the way trading arm is probably one of the most profitable in which the bank is behaving suggesting that the areas and you cannot reward the traders properly culture has not changed all that much, that because the Treasury seems to have reserved the individuals are being performance managed out of right on bonus remuneration. You are now exposed the organisation, there are still targets being set at in areas such as Dubai. I am beginning to ask the the same level as they were before the economic crisis question whether you are almost solvent, whether and they were being told that some staV are actually you are in a position to maintain a bank of the size buying the company’s products themselves or selling and ambition that you are in. You have the them to members of their family in order to maintain European Union pulling one way, the Treasury then their place in the organisation, that league tables are makes an announcement a couple of months later operating, and so on. That does not give us the saying you have got to be broken up, and we are not impression the bank has changed its spots at all. Can quite sure whether that means sell oV your you understand why we have got some anxieties? investment arm or a few branches. It is a very tough Mr Hester: I certainly did not mean to say things ask. Are we all just kidding ourselves that the were rosy; I thought I said the opposite. Working at taxpayer owns a large share of you just to maintain RBS today feels very embattled and thankless. There you at the size and scale you are because of the are diYculties in dealing with customers who are political consequences for all those workers who are cross with banks, and RBS in particular. There are trying to get through it to keep the share price up diYculties with job security. There are diYculties because most of them have private investments in it? with the prospect of being paid less than other In five years’ time, from the bank it is now, how people. There are diYculties with loss of pride, loss diVerent do you think it will be? Will it exist? Will of personal savings in the value of the bank. There you have sold oV Coutts, the profitable units? are diYculties everywhere and there is an enforced Mr Hester: Of course what we are doing is diYcult pace of change in the restructuring of RBS the like because the situation we found ourselves in was of which no other bank is going through. All of these diYcult. Many other people in this world have are great stresses on staV. The only problem is there diYculties that they are coping with as well, so that is no way out of that, these are all simply facts and is why I do not complain about it. I think I can what we have to do is deal with those diYcult facts unambiguously say that we are not only solvent but in the best way possible, and that is what we are rather strong. The issue is that that strength has been trying to do. Sometimes we will get that right and derived from state support which in a perfect world sometimes we will get that wrong. What I do know we would not have needed and my goal would be is if we fail to make the tough decisions and fail to that we never need again. The restructuring plan that make them quickly, the period of diYculty will last we have announced that we are following is, in fact, longer, it will not go away, and the consequences of the largest and most far-reaching restructuring plan failure will be greater. On your specific point of ever by any company in the world, never mind any performance targets, I think it is absolutely essential bank, and it needs to be. It does involve quite in all businesses that people be incentivised to dramatic change to RBS in its size, scale and scope perform well in whatever their job is, and inevitably and in its culture, controls and management, really that involves targets as part of that process, so I every part of RBS. In some ways it was designed to would not be apologetic for one second about the be the most radical and far-reaching that we thought existence of targets. I would hope that we want was plausible to successfully execute, if I can put it people to perform at a high level so we would set that way. So far, one year into what I laid out as a targets that are stretching. Equally, it is very five-year plan, we are at least on track and probably important that targets are stretching but doable, and ahead of where we thought we would be, so that if they should fail in the second bit of those that we gives me encouragement. I believe, in fact I would should be open to making those adjustments. If say I am confident, that the recovery plan is there are areas where we are falling down on then I something that we can do. It is not without risks. would certainly hope we would address the issues. If One of the risks is indeed, if you like, politicisation. staV members are not up to the job we have a Another risk is the external economy and a third risk responsibility to all the taxpayers, frankly, for is our ability to work with our own staV internally to having people who are up to the job. All of these make the changes necessary, which are quite far- things are about maintaining a very diYcult balance, reaching and diYcult. All of these are risks but we trying to get the recovery of RBS and trying to have have tried to responsibly address them and, as I say, good staV whilst understanding all the pressures all so far we seem to be on a path that would give of our staV are under, and it is a series of diYcult confidence that we could get to the right end place. balancing acts. 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Scottish Affairs Committee: Evidence Ev 95

2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles

Q630 Mr Davidson: The emphasis from what we and the approach we have taken there is to try and have heard and what I have picked up from my own achieve this through negotiation rather than constituents seems to be much more on stick than on imposition. Only a very small percentage of our term carrot. One of the points in relation to the work that loans have been re-priced in the last year. 14% of our staV are being asked to undertake is there seems to term loans have been re-priced in the last 12 months. be more incentive for them to be selling lending A considerably high percentage of overdrafts have products rather than saving products when it was been re-priced, but in all cases that has been by face- actually the pushing of credit that helped get the to-face negotiation. It is necessary for the banks to country as a whole and the bank into the sort of re-price some facilities that are related to base rate position it was in recently. The fact that there seems because if that did not happen the banks would be to be no change in that culture is obviously a cause losing money and to stay in business it has been of some concern for us. Is this not something that necessary to have these discussions with your clients. you are addressing? If you think about the average cost of funding that Mr Hester: To pick your specific example, the I talked about, it is all north of 3%. If somebody is 1 incentivisation around savings has dramatically borrowing at one over base rate that is 12%, so changed in the last year to increase the emphasis put eVectively if we lend at one over base rate we are on savings throughout the bank, and as a result of selling pound notes for 50 pence and we cannot do that RBS has outperformed most of its competitors that as a business. The cost of our raw material in improving its performance in savings which is one funding has gone up and we need to try and share of the reasons why the bank is today a safer place that burden with our customers. That is how the than it was a year ago. We do try to make conversations have gone with our customers over appropriate changes. Of course we do not always get the course of the last 12 months and I must say it right but we certainly try. customers, almost without exception, have been very supportive and we are very grateful. We have not tried to pass all or most of the burden on to our Q631 Chairman: I am sorry, I have to leave within customers; we have absorbed the vast majority of the next few minutes and Mr Davidson will take the that increase and cost. The impact on our profits in Chair. Before I go, I want to ask one question which the last 12 months was a reduction of something of repeatedly my constituents who have business the order of £150 million by absorbing the increased interests raise about all the banks. Although the costs of funding and liquidity, but we needed to have interest rate is now 0.5% they say that the overall an element of re-pricing to stay profitable to burden on businesses has increased by either high maintain Clydesdale Bank as a viable business. I am interest rates or a commitment fee or overdraft sorry that was a bit of a long answer, Chairman, but facility. They are not getting the benefit of the thought it was important. reduction in the interest rate. The second issue which Mr Coles: Can I just add a point from the building they raise with me is that the people who are loyal to societies’ viewpoint backing what David has just your banks, whether it is the Royal Bank of said. It is certainly the case that the interest rates you Scotland, Clydesdale Bank or any other bank, for have to pay in the retail market at the moment are many years and have loan facilities and overdraft 1 1 34%, 32% up to 5%. I can certainly back what facilities with you, when they put applications in for Stephen has said that RBS and its brands are very an increase of the overdraft or loan, when they buy competitive in the savings market at the moment. a new business or have expansion plans, the banks Many of my members complain about unfair demand that they have to review the first competition from state-owned institutions. commitment they have with existing customers Certainly there is more competition now from large before they can consider their application to extend banks for retail savings than was the case a couple of more facilities. Can I have an answer on this, please? 1 1 years ago. You are raising money at 34%to54%, the Mr Thorburn: You raise a number of points there, so regulators, the FSA, are asking certainly building I need to take a little bit of time to talk through some societies, and I suspect banks as well, to put more of the issues you have raised. First and foremost, money into very high quality liquid assets and not to base rate is irrelevant really to us as a bank in the cost lend at all but you need to keep a buVer behind so of providing lending to our customers. We raise that if we have any financial stresses again in the funds to be able to lend to our customers from three future you have got money there to repay the main sources: deposits in branches, and today you 1 1 depositors when they want to have their money would be paying anywhere from 34%to54% to have back. That high quality liquidity does earn base rate, your money in deposits, so deposits bear no relation so building societies are paying, say, 4% for new to base rate either these days; secondly, you raise money and a fifth of that money is being invested in medium-term funding and the average cost to us of liquid assets at half a per cent, that is earning base 1 medium-term funding is of the order of 34% again; rate and, therefore, you have got to earn even more finally, you put capital into the business and the cost of a margin to cover the loss that you are making on of capital is 8% or more. Base rate is a little bit of a that when you are pricing your mortgages and other red herring in terms of the cost of lending. The true products. I would reiterate what David has said: cost of raising funds on this side of the balance sheet base rate is totally irrelevant. Of course, that is the to lend them on that side is much, much higher than public figure, that is what everybody sees as the cost base rate. That is the first thing I would say. As to the of funds, but if you go into the savings market at the question around re-pricing discussions with moment and trumpet a rate of interest of 0.5% you customers, I can only speak for our own institution will not get much of a deposit inflow. Processed: 12-03-2010 18:53:03 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG5

Ev 96 Scottish Affairs Committee: Evidence

2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles

Mr Hester: I can basically say the same in diVerent because our problems, not just in this country but words. The facts which we set out for the first nine across the world, came from too much borrowing months of this year in our last results were that the and not enough saving, and it is extremely important average interest rate paid by small business for the future of this economy that we get into a habit customers of RBS has halved in the last year and a of saving more and borrowing less. The public policy 1 half, has gone from just over 7% to about 32%, so the role is for that to happen voluntarily, for people out interest burden has gone down considerably,but you of greater conservatism to save more and borrow are absolutely right to say that the margin of the less, rather than in an forced way, which is why I interest cost relative to base rate has gone up for completely support the Government’s objective to borrowers in general. Not every borrower, but in make sure that banks like RBS have the capability to general. What we simply have is a shift in power in meet borrowing demand, so if borrowing demand is the world from borrowers to savers. The world was down it is the choice of customers, not forced on awash with money being thrust at people who them by banks unwilling to lend. I can absolutely borrowed and they achieved it on unrealistic terms clearly tell you that we are open for business and, in in past years, and that is why we are in the trouble we fact, we have available today £27 billion worth of are in. With the shift in power, what crudely is undrawn overdraft finance to companies in this happening is that savers’ money is more valuable so country, in addition to additional overdrafts, which they can demand more for it and borrowers have to is not being drawn down any more. Of course, if you take up the slack and banks sit in the middle. It is are a business and you need money, the easiest and very easy to get a 3% interest rate on a savings first place to get it is from your overdraft where there account from RBS or any other bank, but base rates is no change of terms, no covenant, no new are half a per cent, so that would mean for every application, nothing, and if there were great 1 pound of savings you pay 3% but you are losing 22% financial stress we would expect that £27 billion of which has to be picked up by someone. The amount overdraft to be drawn down, which is not that banks take out of the middle has gone down and happening. I think we should all be pleased, it is a not up. There is this big shift, which I agree is not good news story that the UK economy is beginning well understood and needs better explanation. On to rebalance and walk away from its over-borrowing Monday of this week we published a charter for habits. We are only beginning, so the next few years small business customers, part of which is a much will be important to see that continuing. I think it is greater process of visibility in explaining to people also good news that, thanks to Government support, the make-up of charges so they can have a greater the banks are able to support those customers who understanding and obviously agree or disagree at the nevertheless still do want to borrow and are doing it. end of it. Q634 David Mundell: I will ask each of your In the absence of the Chairman, Mr Ian Davidson colleagues that question and then come back on a was called to the Chair specific point. Mr Thorburn: I will spare you what the PR people Q632 David Mundell: A question to everyone. My would tell you. I think people know Clydesdale constituents’ perception would be that the banks are Bank has been open for business and from the most not open for business in the sense of providing new recent annual results you can see there was a growth lending to businesses. That is clearly their in business lending and growth in mortgages. To try perception, but each time we meet PR people from and help the Committee understand this, there are a all the banks they give us an explanation that this is couple of things that always happen in a downturn, not the case. What is the reality of that? Is there new and I have been through recessions in the past in my lending out there? I think, Mr Hester, the last time I career, that aVect people’s perceptions about the met one of your colleagues he indicated that the fault availability of finance. First of all, even though lay with prospective borrowers because there were banks are generally open for business and making not enough people coming forward to ask for loans. lending available, they have less appetite in some Mr Hester: Let me say unambiguously that certainly sectors than others. You will probably find quite a as it relates to RBS we are open for business and lot of the feedback you get from your constituents is eager and willing and able to support viable down to the fact that they operate in sectors where customers. In the year so far we have made new banks will have less of an appetite to lend. The most loans totalling about £45 billion to business obvious one would be property. Other sectors that customers alone in the UK in addition to the lending might be more vulnerable in an economic downturn in the personal sector. We lend to many hundreds of tend to get a more cautious reaction from banks. thousands of businesses every year in that regard. Motor traders, things of that nature, can experience The percentage of loan applications that we accept that. I have certainly seen that in the past. That is the is unchanged from the boom times, it is roughly 85% first thing that will be making some of your of all loan applications made to us from businesses. constituents feel as if it is more diYcult to raise finance. The other one is a lot of business lending in Q633 David Mundell: In terms of volume? particular is what you might call projection led, so if Mr Hester: 90% are mortgages. The volume of loan someone is buying a new business or expanding into applications, in other words the number of people a new area they cannot demonstrate with the asking us for loans, in the business area is down by profitability of the business they have today that some 37%. 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Scottish Affairs Committee: Evidence Ev 97

2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles this new business venture. In the good times there is business, the real estate business, either because they always hope value in the judgment that takes place actually are or because they are small shopkeepers between the bank and the customer around the where their primary asset is a building in which they relative likelihood success of this business plan, and have the shop. Given that real estate has been one of in the good times I guess people go with hope value the hardest hit of the sectors in the economy, I think more than they do in the bad times. In particular, you would also be seeing some diVerential from that people who are looking to grow their business where concentration as well. a lot of it is based on trying to assess viability that Mr Wallace: The challenge I have when it comes to does not exist today will find it more diYcult dealing lending, and I have heard the answers when it comes with the banks. Those two things in particular are to the diVerence between the base rate and getting probably what is leading to the perception your money on the wholesale market, et cetera, is there is constituents have about the availability of finance. almost a schizophrenic experience for a Member of Mr Coles: Building societies, of course, are not Parliament with their constituents. If it is a business, typically financing small businesses, they are much and I have to say both RBS and Clydesdale, which more financing home purchase. The key issue for is a Yorkshire bank in my area of Lancashire—work building societies is funding and the funds are just that out, Yorkshire and Lancashire—are very not available at the moment. As I said towards the proactive and you have both been supportive of my beginning of this session, there are virtually no businesses that have got into trouble and need additional deposits available in the economy this refinancing and always made a lot of eVort to come year and there is very severe competition for those and see me and them. We recently had a meeting with deposits from institutions such as National Savings, refinancing that I sat in on. Then you go to personal and the Government is borrowing £175 billion this lending and that is where you get the schizophrenia. year, from semi-nationalised banks, from You get personal lending where your credit card nationalised banks, such as Northern Rock, and we interest rates do not bear out the gap between have news this morning of greater competition from savings rates and borrowing rates. You are way up the Post OYce potentially, and greater local into the double figures, 10%, 12%, 16%. I should not authority support for credit unions. Building think either of you have a credit card that is below societies are almost unique in having very little 12% or 15%, apart from a nil per cent balance support from the taxpayer and that makes it very transfer for six months. You have unsecured diYcult for them to compete in the market. When personal loans way up there. You have both your they do lend they tend to be more conservative banks sending letters to constituents saying, “Sign and careful on their lending now, there is far less the blank cheque and you will get your money”. It is 90%-plus loan-to-value ratio lending than used to be very easy on a personal lending basis to continue the the case. If you do lend in a way that the markets allowing of personal debt. would term adventurously then you will get Mr Davidson: This question is really on businesses. downgraded by the credit rating agencies and that will make your funding costs, especially in the wholesale market, even greater. Q636 Mr Wallace: Yes, but it is the schizophrenia. You say it is harder to give financing to businesses, and Mr Hester talks about the problem of changing Q635 David Mundell: In relation to the responses the balance between borrowers to savers, but at the which Mr Hester and Mr Thorburn gave, is there same time you are continuing down the path of any marked diVerence between larger business and personal loans, personal lending, of encouraging SMEs? Are your remarks across business as a whole borrowing at high rates. In a sense, you cannot have or is there any diVerence in those sectors? Again, it is it both ways. You cannot say it is expensive to lend in probably natural because the people who approach business, but meanwhile you are eVectively “ripping MPs would mainly be people from the SME sector, oV” personal lending at the other end. A very but they are people who particularly feel that the profitable part of your bank is personal lending. banks are less amenable to them. How do you square that circle? Mr Hester: The principal remarks would go across Mr Hester: If I may just correct the last bit. Our all of business. There are a couple of diVerences that personal bank, what we would call our retail bank, may be worth drawing out, however. The SME is breakeven, it is not profitable. We are not making sector actually tends to deposit as much as it enough money. That is partly because our costs are borrows, so people spend a lot of time talking about too high, so we are trying to address that. It is partly SME borrowing but the real borrowers amongst because bad debts are too high because we have lent corporates are bigger corporates and small too much to people or to the wrong people, and that businesses will deposit at some time and draw down happens in a recession and is partly on the income at another and are much more balanced and side. Far from profiteering, we are actually not traditionally have not been big borrowers and that making enough money to service our capital in these is still true in aggregate today. Of course, the bigger areas. However, I think you are right that one of the companies have had a booming equity and bond mistakes the banks in general made was to make market this year that has allowed them to refinance personal borrowing too easy and on too stretching a more easily than smaller companies, so I can say that basis, the classic example being the Northern Rock would be a diVerence in favour of the bigger 125% loan-to-value, which we know has ended in companies. It is also true that a bigger percentage of tears in lots of directions. I agree 100% that one of small businesses are essentially in the property the things the banking industry must do, and I Processed: 12-03-2010 18:53:03 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles believe that the FSA is engaging very intensely with saying, “I am being asked to put up more security” the banking industry on, is to cut out what you or whatever. We do that in order to be able to say yes, might call inappropriate lending but, on the other whereas if we were not asking for that extra security hand, to still make available appropriate lending. we would have to say no. One of the things in the mortgage arena as an example that I am pleased about is that we are one Q639 Lindsay Roy: Is this where your second chance of the prominent lenders making available 90% hotline comes in? loan-to-value mortgages, not higher than 90% but Mr Hester: Our business hotline is both for people 90%, which helps first-time buyers and, in fact, 17% we have turned down as an appeal mechanism and of all our mortgages this year have gone to first-time for businesses who bank with other banks who have buyers as a consequence of that. We should not be been turned down to come to us. It is another piece lending more than 90% because I think that would of evidence, if you like, of how we are trying as hard be wrong. It is balancing all of these things. What I as we can to support viable businesses. If I may use can assure you is that far from profiteering we are this platform to say this: one of the disappointments currently not making enough profit; in fact not we have had in the last two months since we making any profit in our retail bank, and that is launched the business hotline is we wrote to every something we need to change. single MP in the country asking them to bring Mr Thorburn: On that specific point, unsecured forward constituents’ problems to the business consumer lending, so personal loans and credit hotline and so far only three MPs in total have taken cards, we have been actively reducing as a advantage and sent customer complaints to us in proportion of our business over the last five years, so identifiable ways. If I could use your Committee to it is not an attractive space to be in either. It was 14% encourage more MPs to bring forward constituency of Clydesdale’s assets three or four years ago and worries, we would be very pleased to handle those. today it is about 6% or 7% of our assets. The bad debt experience is pretty significant with those Q640 Mr Davidson: Can I just follow up the point products. It is risk-based pricing and the reason the about the 85% you are saying yes to. Is it the same pricing is so high is because of the bad debt percentage that are then going ahead to accept these experience, the cost of collections and the cost of loans or is there a higher number once they have administering them is high as well, but it is not a big these additional conditions applied declining to or growing part of our business. accept them? Mr Coles: I would add to the points that are made Mr Hester: I will write to you if there are other on profiteering. Building society profitability in factors that I am not in possession of, but my relation to the size of the business halved in 2008 understanding is roughly half a per cent of people we because of the squeezing of margins. To back up approve turn us down based on pricing conditions. what the banks have said, if you look at the KPMG study of retail UK banking profits, in the first half of Q641 Mr Davidson: That is no worse than it was this year they fell 78% compared to the first half of before? last year, the big four banks. It is very clear that very Mr Hester: I suppose it is such a small percentage low base rates squeeze margins and are significantly that I am assuming it cannot have changed much. challenging to the current model we have of retail banking. Q642 Mr Davidson: What we want to clarify is whether or not the conditions which you are now Q637 Lindsay Roy: I am making an assumption applying, which are a bit tougher, are leading to a from what you have said that there is money much larger number declining the loans? available for lending, so the main reasons for Mr Hester: Certainly, as far as I can tell on a businesses being turned down are in relation to statistical basis, it must be true that it is similar. viability and risk. Would that be fair comment? Mr Hester: I would hope that would be the only Q643 Mr Carmichael: What impact does the reason why someone would be turned down. Treasury target have on your lending? Mr Hester: The lending commitment has Q638 Lindsay Roy: Can you give us an indication of encouraged us, frankly, to do what I would have how many businesses were seen as viable a year ago, hoped we would have wanted to do anyway, which say, but are not in that position now in terms of risk is to expend every possible eVort to make lending for banks? Of the people coming to you, what available to viable customers in the UK and the percentage roughly? Government support that lay behind that is what Mr Hester: For RBS we are turning down the exact enables us to have the financial wherewithal to do same percentage, so 15% of businesses that apply to that. us for lending get turned down, 85% get accepted. That percentage is more or less identical from pre- Q644 Mr Carmichael: Are you confident of meeting crisis. What I should say, to be fair, is that is because your target? we try very hard to say yes. In the case of a business Mr Hester: I am very confident that we are today, which itself is weaker today, rather than say we and will be tomorrow, in full compliance with our refuse to lend, normally what we would do is attach agreement. Our agreement is that we will make more strings to the lending than we would have done available a certain amount of lending at market in the past to reflect that, so you do hear borrowers prices to creditworthy borrowers, and we certainly Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles are doing that and will do that. As to how much of interest charged to cover the risks of lending to sub- that lending is taken up, we do not control that piece prime customers, which typically building societies of it. So far the evidence is that in the personal space, did not do very much of but did do a bit and they did in mortgages, eight months into the fiscal year we not price for risk, so riskier clients are now paying an have already beaten the target for the full year. It appropriate price or not getting the loan at all. looks as if we will lend rather more than we were Mr Thorburn: At the end of the day one of the key asked to in the mortgage arena. In business lending causes of the credit crisis was systemically under- the opposite is true and so far, as we talked about in pricing risk and a necessary unfortunate adiVerent context earlier, businesses have been consequence of that was this re-pricing. choosing to save and borrow less, and there it looks like our gross lending will miss the target by a lot, although we will be in full compliance with what we Q647 Mr Davidson: We understand that and you said we would do. make it all sound so reasonable, but when the legal profession and the Federation of Small Businesses were here they clearly either did not accept or Q645 Mr Carmichael: Your target is the money you understand the way in which you are presenting this. make available, not the money you actually lend? Is this simply a question of communication? They Mr Hester: Our requirement is the money we make were quite clear about suggesting to us that they available. The money we lend, unless I hire a were being milked to build up your balance sheets, helicopter and scatter it around the country,depends and they were also saying they thought while you on someone coming to ask for it who is creditworthy. had been too soft, in a sense, in assessing risk in the V All we can control is our e orts to make the money past you have now swung far too far the other way. available, we cannot force someone to take it and Is this just a question of communication and you are nor do I think you would want us to. failing to communicate the reality of the situation to Mr Carmichael: I think the helicopter is generally them, or is there some truth in what they are saying? regarded as poor practice now! They were quite explicit when they sat in front of us. Mr Hester: On the pricing, we believe there is no Q646 Mr Davidson: Can I just come back to previous truth at all and think the data is unquestionable on hearings that we have had. We had the Law Society that. There must be an issue on communication of Scotland and the Federation of Small Businesses which, as I mentioned, in the case of RBS is why we suggesting to us that they were being oVered have published this new small business charter, part unreasonably high fees and renewed finance being of which is communication, and why we spend a oVered at far less favourable rates than previously. great deal of time, and obviously must keep doing The suggestion they were making to us was basically so, with professional bodies around the country and they were being milked in order that you could Chambers of Commerce and so on to explain things, rebuild your balance sheets. Do you think that is and partly it is classic pressure groups, you argue reasonable? your own side, and if you are a borrower you would Mr Hester: There is no evidence to support it. What like to borrow more cheaply, just as if you are a saver is true is that the margin, and I include fees as part you would like a higher savings rate, and we should of the margin, relative to base rate has gone up. That always expect that. On the subject of caution, the is absolutely true. All of that money, and more great diYculty with credit decisions is you only know besides, is being paid away to funders of banks, to afterwards whether you got it right or wrong, and savers, and the banks are taking less out of the since none of us are perfect forecasters of the future, middle than they were before. That is the factual in fact many of us are deeply imperfect, we will only position, but clearly if you are a borrower you are know in a few years’ time whether today’s credit only seeing one side of it. I completely understand standards are too cautious, not cautious enough or that borrowers are having to go through, if you like, roughly in the middle, so all people can do is apply a shock from a world where money was flowing their best judgment and it is very hard to know everywhere and being thrust at people to borrow to a whether that judgment is right or not. world where the pendulum has swung back a lot the other way.It is not only an opinion, it is cast iron fact that the banks lending to businesses in this country Q648 Mr Davidson: Does the same answer apply to are making less profit than before and not more. your colleagues? Mr Coles: I would agree on behalf of the building Mr Coles: I think so. Certainly lenders have had societies in the savings and mortgage markets. As we their fingers burnt as a result of the losses they have explained earlier, there is a very significant margin made on loans they were making in the earlier part now between the average mortgage rate, and I dare of this decade. I would add a point to the one that say the average rate paid by small businesses and the Stephen has made. Regulators have become more bank base rate. Those margins were too low in the cautious. There is a danger that lenders have become past. Also, I would add to what Steven has said. over-cautious in the way that you are suggesting. I There is a greater pricing for risk now. If you look think the FSA is in a very cautious mood now in back three or four years there was insuYcient asking especially building societies to build up their additional mortgage rate charged on people who capital and liquidity.Credit rating agencies also have had 95% or 100% or 125% mortgage loans in the case had a huge impact on building society business. I of Northern Rock. 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2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles years that they should not have rated triple-A and Mr Davidson: We have got a number of questions they are probably rating some things single-B now still to ask. I have got to be somewhere by nine and that do not deserve such a low rating. I know Mr Hester has got to be somewhere by five, Mr Hester: We must all be really crystal clear that a so we will try and rattle through some of them a bit safer economic system, a safer country and safer more quickly if we can. banks by definition means less credit and a higher cost for credit across the economy; you cannot have Q652 Mr Devine: You just said about 85% of one with out the other. If we want a safer banking applications for SMEs you have approved. Do they system and a safer economy we must understand all know the price and cost of credit prior to applying that credit will be harder to get and more expensive. for it? Mr Davidson: Yes, but we need to have the porridge Mr Hester: Not necessarily prior in the sense that not too hot nor too cold, and I think that was the part of the approval process is what is the right rate point the FSB were making. for that loan. That is why,on my data, half a per cent of people who have applied and get approved then say, “Now we have seen all the terms and conditions Q649 Mr Wallace: You talk about the cost of risk we do not want it after all”. There are some and the pricing of it and we have got to get used to amendments. I would say generally people know the a higher pricing and no-one is perfect in their ballpark but the final rate is part of the response to forecasting, but when you have such a vast gap the application. between some products at 20% and some products lower that is an indication when you evaluate risk it sends the interest rates up at one end of the scale but Q653 Mr Devine: Lloyds TSB and NatWest are to the cost of money borrowing on an open market is disappear from the high street in Scotland. What at the lower end. Surely that has been an indication impact will new competition have on the market for for quite a long time that it is in the wrong direction. SME lending? Convergence is the thing that gives you comfort, that Mr Thorburn: It is a very concentrated market in the there is not much of a gap between the cost of the UK in general, and Scotland in particular. As one money and the risk to the money. That is what I indicator of that, just over two years ago Clydesdale find peculiar. Bank would have been the eleventh biggest bank in Mr Hester: Certainly the credit card and personal the UK with UK business assets of about 30 billion loan borrowing in a recession has huge losses. and today we are number seven in the UK, but our next largest competitor is over four times our size. There are a very small number of players really by Q650 Mr Wallace: You are pumping them at the global standards in the SME space. There is no sign front door and at the bank tellers. That is what we of any material new entrants, although what will hear from people on their bonus incentives, that you come out of the carve-outs from RBS and Lloyds are still pushing them out at the tills of the banks may change that somewhat. I think it is going to stay while at the same time saying what you are saying largely as it is for now. Having said all that, even if here. If it is not profitable then forget it, stop paying you go as far back as the Cruickshank report in the them and encouraging them with that mechanism. early 2000s into the profit pools around SME Mr Hester: I hope the way that the combination of business banking and the UK, it concluded that the incentives and credit limits work is that we would not Scottish marketplace, which is essentially the same be extending credit to people with a lower likelihood as it is today, functioned satisfactorily. I would not of not being able to pay it back than would have want to alarm you by talking about the been the case before. concentration here, I think that is a fact of life, but notwithstanding that there is good competition for SME business in Scotland. Q651 Mr Wallace: But you do not know that when the person comes to the till and is asked, “Would you Q654 Mr Davidson: Following up the disappearance like to have an RBS loan?” You do not know that of some players from the high street in Scotland, do person. you think the mutual sector will be looking to take Mr Hester: We try to in the sense that we might invite over some of those branches? someone to apply but when we actually grant Mr Coles: Conceivably looking to take over some of someone credit it would always be through some the branches although, as I said, the mortgage form of credit assessment, credit scoring, whatever market has contracted by such a significant amount the mechanism would be that would try to answer that building societies are more likely, I am afraid, to the issue of is it aVordable for them and is it be closing their branches at the moment. Over the responsible for us to lend. There is always scope to last ten or 15 years they have closed branches much improve that assessment but that would certainly be more slowly than the banking sector, but only this the intent. I do not believe we make lending available week—a long way from Scotland–Norwich and without some consideration, whether accurate or Peterborough, for example, has announced the not, of what the review mirror tells you as to closure of ten of its branches out of 50 because of aVordability. Short of saying we refuse to give competitive pressures to some extent, and you will anyone a credit card again, it is not that credit cards see from this morning’s Daily Mail they are blaming are bad but perhaps there were too many of them competitive pressures from nationalised banks and given on too high a credit limit. government-sponsored institutions making it Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles extremely diYcult for them to compete in the experienced and empowered to be able to help the market. There may be one or two limited examples customer negotiate an extension of terms and where the remaining Scottish building societies and interest-only mortgages, things of that nature, to try other English-based building societies want to take and prevent the crisis from hitting the family too over some of the branches but I would not have hard. In addition, we have had training and raised thought a significant more. awareness amongst our frontline staV in branches of that centre of excellence but in general their Q655 David Mundell: The comments that you have approach is to try and help customers through this made, what are their context in relation to Scotland? downturn rather than exacerbate the situation. I suppose we are slightly assuming that they are Mr Coles: I would give four answers to that question applicable to Scotland, but is that a variant of as to why repossessions are lower than expected. At elsewhere in the UK? Are the trends of what is the start of this year the forecast was 75,000 happening with mortgage lending, small business repossessions across the whole of the UK; the likely lending, business lending, the same across the whole outturn now is less than 55,000. The reasons for that, of the UK or is there anything specific and diVerent I think, are very low sustained rates of interest, happening in Scotland that would be of relevance which are really supporting the mortgage market to us? through a diYcult period, lender forbearance, and Mr Hester: I would say that the broad trends are lenders have learnt a lot from what happened in the comparable. Two specific things: house prices went early 1990s and are really bending over backwards in down less in Scotland in general than elsewhere, so the way that David suggested not to repossess, and, that is a positive, and our small business lending is thirdly, there is a lot more money going into the up a bit more in Scotland than the rest of the country. provision of independent debt advice. Research we The diVerences are not so huge that I think one have undertaken shows first of all the earlier you go should draw major conclusions from it. to your lender the less likely you are to be repossessed. This may sound obvious but we have researched it and showed it now. Also, if you take Q656 David Mundell: Is mortgage lending in independent debt advice from something like Scotland proceeding at a higher level or is there more National Debtline then also you are less likely to activity than elsewhere in the UK? suVer repossession. There is much more Mr Hester: That would not be my data. Government money going into the provision of Mr Coles: I do not think so. I would support what independent free debt advice now. Fourthly, I would Stephen has said. If you go back through all the say the various Government initiatives. I would pay housing market cycles, to the early 1970s boom, the credit to Lord Myners and the Home Finance late 1970s boom, the late 1980s boom and the recent Forum which has brought various government boom, you will always see greater volatility in departments, lenders and trade associations housing markets the closer you are to London. The together to discuss these issues which has had a London and southeast of England market is very beneficial impact. volatile in terms of variation in house price inflation. The closer you get to Scotland, the more stable the market has been. In all of these cycles that applies in Q658 Mr Davidson: I wonder if I could just follow up southwest England, Wales and northern England as this question of fair treatment of customers because, well. To that extent, this cycle has been very typical. again, we have had previous evidence from Citizens Mr Thorburn: I agree with what has been said. Our Advice in Scotland who gave us quite a litany of grief asset quality and bad debt experience through this about what they believe to be bad behaviour by downturn in Scotland has been, not dramatically banks and financial institutions. They particularly but, a little less pronounced north of the border than raised with us issues relating to the practice of silent it has south of it. In general it is a little better in phone calls where we understand banks are phoning Scotland than it has been elsewhere in the UK. out to more people than their operators can handle, unfair overdraft charges, using the right of set-oV to Q657 Lindsay Roy: Some customers are obviously use benefit payments to pay oV credit cards and still struggling with mortgage payments and we hear encouraging, virtually forcing, some customers to that there has been less of an impact than during the take out more products to pay oV existing debts. Do last recession. What have you specifically been doing your companies use any of these practices? to support these people? Mr Thorburn: I will pick up on two of the points you Mr Thorburn: There are two or three key things. One raised particularly. We do have one of these is a policy we have pursued of trying at all costs to automatic dialling systems. It is not used extensively avoid repossessions. The Council of Mortgage in our business but it is used. The guideline from the Lenders’ estimate of repossessions in the UK over regulator is there should not be more than 3% of calls the last 12 months is of the order of 45,000 or so and that are silent calls and our own internal guideline is 1 Clydesdale has had 25 in Scotland. It is very much a half of that, so 12%. We do not exceed that and have last resort. We also established a specialist unit in our never had a complaint through Ofcom about our use regional oYce in Leeds which was staVed by of that system. The system can be used responsibly experienced mortgage advisers to be available as a if you have the right controls around it. In relation best practice centre for customers to phone up when to the right of set-oV, we do that in a minority of they are experiencing financial diYculties or have cases, but it is how we do it that is important rather lost their job, things of that nature. That unit is than the fact of doing it. 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2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles it would never be done without at least two letters Mr Hester: Obviously it is hard for me to speculate having gone out to a client around arrears. If there is on what they will say. no response to that we consider that as a strategy. Some banks have an automated system for right of Q661 Mr Davidson: If you have had a dialogue with set-oV and it just happens. In our organisation it is them you would know what they would be saying, entirely manual and to wish to do that one level up surely. in the organisation has to approve the individual to Mr Hester: I am unaware of major issues of use that strategy. It would be done, if at all possible, contention between us and the Citizens Advice in discussion with the customer to try and find a way Bureaux, with the possible exception, which I think to avoid it. In that regard, we certainly adhere to the is a bank-wide issue, where clearly there has been this lending code which specifically prohibits oVset of a long running controversy over overdraft charges. lot of social security benefits against debt. We use it pretty rarely, thoughtfully and responsibly and Q662 Mr Davidson: I specifically did not raise that certainly not in the situation that was described because I am conscious that is being dealt with there. elsewhere. Leaving that aside, I very much have the Mr Coles: Building society mortgage arrears and impression that it is yourself, Lloyds and HBOS that repossessions are less than two-thirds of those on are the main villains of the peace. average in the mortgage market across the whole of Mr Hester: That would not be my understanding. the UK anyway, so the pressure on their staV to adopt these aggressive tactics is somewhat less. Typically, building societies do not oVer credit cards, Q663 Mr Davidson: If you are happy,we will go back current accounts or overdrafts so many of the issues to CAS and ask them and some of the other money that you have raised just would not apply to the advice centres and we can maybe promote a dialogue building society sector. oV-centre. Mr Hester: I would generally echo what David was Mr Hester: That would be great. saying. Clearly, in a big organisation sometimes Mr Coles: We are members of the Money Advice there are mistakes but we make an eVort to deal with Liaison Group that brings together lenders, trade our customers very fairly and wherever we fall down associations and various elements of the money we try and improve. advice sector. For 10 years I sat on the board of the Money Advice Trust which operates National Y Debtline and just recently when we launched our Q659 Mr Davidson: I find di culty in reconciling research into arrears management, where we found what the three of you have said to us with what CAB the data about if you go to independent advice then was telling us. The way in which CAB was explaining you are likely to come out better, that was launched it to us was that there were some banks in particular for us by the chief executive of the Money Advice which are constantly harassing customers, which Trust. There is plenty of dialogue as far as I am were refusing to deal with intermediaries such as concerned. If there are issues that your previous CAB, and even when there was a deal done other witnesses would like me to take up with individual people for the bank would continue to phone building societies, if that is the issue, I would be very customers, harassing them and there would be keen to get hold of the details. several silent phone calls during the course of the day, and all of that building up pressure all the time. The answers that three of you gave sounded Q664 Mr Davidson: We will approach them as well. eminently reasonable, but there is this discrepancy. I Mr Hester: I have been passed a note. wonder whether or not there is any organised dialogue between yourselves and people like the Q665 Mr Davidson: We could see your minders in the Scottish Association of Citizens Advice Bureaux and back scribbling furiously. other money advice centres to discuss these issues? In Mr Hester: I am told that actually we have a pilot a sense, they should not have to come to us for us to scheme with the Citizens Advice Bureaux whereby hear the complaints and us to put them to you, there some of their advisers are actually sitting in our should be some dialogue between you. Is there any branches working alongside with us in these matters. dialogue? I think that would be an example of a constructive Mr Hester: Yes, there is. Certainly in our case one of engagement with them. our greatest, if you like, charitable uses of money is to support something called MoneySense, which is Q666 Mr Davidson: But it does not prove that there trying to support people all around the country in are no diYculties? financial education. We are in constant dialogue Mr Hester: I am sure it does not, no. with and significant supporters of Citizens Advice as well. Q667 Lindsay Roy: Is this the start of a more robust quality assurance system? Q660 Mr Davidson: Let me be clear. If we go back Mr Hester: I hope so, yes. and show the transcript of what you have said to Mr Thorburn: What I said I meant. I am completely Citizens Advice, will they say,“No, it’s not the Royal unaware of any issues around this, but I have made Bank of Scotland that is up to any of these things”, a note to go back and have an engagement directly or will they say, “Yes, the Royal Bank of Scotland is as a result of this just to be 100% sure. We will go as bad as any of the others”? back and engage after this pretty promptly. Processed: 12-03-2010 18:53:03 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG5

Scottish Affairs Committee: Evidence Ev 103

2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles

Mr Davidson: Ask them if they have got anything attractive as a country to do domicile banking and against you as well. I think we have covered that financial service operations in has been our area. education system.

Q668 Mr Carmichael: Where does Scotland’s Q672 Mr Carmichael: The availability of a good, reputation for financial excellence and as a centre of well skilled labour force? financial excellence stand now after everything that Mr Thorburn: Skilled labour, yes. has happened? Mr Thorburn: I think in some ways we make too Q673 Mr Davidson: Is there anything you want to much of the crisis from that perspective. I do not add? think others see us as we necessarily do ourselves. Mr Coles: I travel to Brussels very frequently, talk to MEPs, the European Commission, other banks, and to the extent that any reputation has been damaged Q669 Mr Carmichael: They never thought we were I would say it is the UK’s reputation. You rarely hear that good, is that what you are saying? people talking about the Scottish reputation Mr Thorburn: If you travel around the world what specifically being damaged. you find is in every market in most countries this has Mr Hester: David has put it very well. I have nothing been happening and the media attention has been to add to what David has said. focused on the domestic banks as opposed to what has been happening overseas in Scotland with Q674 Lindsay Roy: Would you agree it is all the more HBOS or RBS. The financial services sector is much important to boost the morale and confidence of the broader than just the banking sector in Scotland. frontline staV as well as the behind the scene staV Fund management and insurance has come through and the executives? There is a diVerence occasionally this downturn remarkably well. Scotland has an between perception and reality. I want to go back international reputation in those areas which has with Mr Hester. I agree with you entirely about stood the test of this particular downturn. The stretching targets and ensuring that people reach problems of some of the banks in Scotland have been their potential, but they need to be attainable and I experienced by very many banks around the world. still get the impression that it is a top-down model. I Scotland still remains an international player in understand you are trying to rebuild Team RBS but financial services, one we should support going there is still quite a way to go. Would you agree? forward and will remain a strength of this nation. It Mr Hester: Yes. has had a diYcult period but I do not think we should obsess too much about it, we should learn from it, build from it and move forward. In Q675 Mr Devine: Can I just ask one question about particular, what is important around reputation here remuneration. What we get is almost a two-tier workforce and we have heard evidence from the is the attractiveness of the sector to school leavers V and university graduates. That is one concern I have trade unions that sta are on £13,000, £14,000 and if here. I am involved in some initiatives to try and help they want to go and work in a pub at the weekend or with that. That pipeline of people from the somewhere else to raise extra money they have got to educational system is very important for the long- get permission. The Daily Record did a story a term success of the sector, that it continues into our couple of weeks ago about the Chairman of your industry and grows. We need to be doing a lot of group who is on £750,000 a year, who has £1.5 diVerent things to make sure of that because it is one million of shares and still has time to take a non- of the key things that have created success down the executive position in an American company. Did he ages, our educational system. That is where a lot of have to get permission to do that from the Board? our reputation and attractiveness as a country Mr Hester: Yes, he did. internationally has come from and we must do everything we can to support that and build on Q676 Mr Devine: What salary does he get from that that strength. second job? Mr Hester: I am afraid I do not know what salary he gets, but he did seek and get permission from the Q670 Mr Carmichael: I thought I understood what Board. you were saying earlier but there is a slight doubt in my mind. Are you saying this is a consequence of the Q677 Mr Devine: Can you write and tell us what Scottish education system? salary he is on? Mr Thorburn: No. Mr Hester: Indeed, he did seek and get permission from UKFI. Q671 Mr Carmichael: Or is it that the banking system is going to be less attractive to products of the Q678 Mr Devine: Can you write and tell us what Scottish education system? salary he is on? Mr Thorburn: The point I was trying to make was Mr Hester: Sure. twofold. One is there is a concern that the industry Mr Wallace: Just on the reputation of Scotland, I will appear less attractive to school leavers and want to specifically ask Mr Hester, because his bank, graduates at present and we need to do something and I suppose Mr Coles when it comes to some of the about that. The other thing I was trying to point out building societies, was in receipt of British taxpayers’ was the reason Scotland has been so successful and money. It must have been quite comforting that you Processed: 12-03-2010 18:53:03 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG5

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2 December 2009 Mr Stephen Hester, Mr David Thorburn and Mr Adrian Coles were part of the UK at the time of this crisis. If you Q684 Mr Wallace: You did not receive any were on your own in a small independent Scotland taxpayers’ money. you probably would not be sitting here today. Does Mr Thorburn: No. I would not want the Committee RBS get comfort from the fact that the UK Treasury to have the impression that our sales targets are has been behind this and the vast sums of money you skewed towards lending, first of all, as opposed to have required have been available to you? Does that deposits—they are very much not—or that we are give you comfort? pursuing the same lending targets today as we were before the credit crisis because, again, we are not. That was when we were talking about our business Q679 Mr Davidson: A simple yes or no will do. or retail banking. That was an important point I Mr Hester: I sense a political trap there! wanted to put on the record. Apart from that, thank you very much for the invitation to be here today. Q680 Mr Wallace: Do you think Scotland could have done that on its own? That is not a trap, it is a Q685 Mr Davidson: Mr Hester, you heard that question of judgment. answer, would that also apply to yourselves? Mr Hester: If you will indulge me, I would like to Mr Hester: What I would certainly say is that our broaden it still further and say I think one of the targets are adjusted all the time. I gave the example really positive aspects of a non-positive situation, of savings targets which by and large have been given more emphasis. There are bits of our business where namely the crisis, is that the world has generally not our targets will have been adjusted upwards because turned in on itself and protectionism of all kinds has there is an awful lot going on, a high level of activity, not reared its ugly head. If I talk about RBS, we and there are other places where they would be received support from a whole range of countries. adjusted down. This is a continual move and what The central banks in America, Australia, Japan and we try and do is to make targets stretching but Europe all provide us liquidity support as, indeed, all doable. There will be times we fall down on that, but other banks. I think the way that governments and that is what we try. central banks have cooperated across borders and across the world is a very reassuring and positive Q686 Mr Davidson: We have tried to reiterate and aspect of a bad situation. some of your agents, as it were, were in the room when the unions were in the room giving their Q681 Mr Davidson: Are there any final points that evidence saying they were under the impression that you would want to make, any answers that you have the incentive system directed people towards lending ready to questions that we have not asked? instruments rather than savings instruments. Are you saying that is not still the case? Mr Coles: I did think I heard Mr Wallace say there Mr Hester: That is what I am saying. were a number of building societies in receipt of Mr Davidson: I think it would be helpful if you could taxpayer support. give us something in writing. Again, it is an issue of dialogue and communication. If the unions are Q682 Mr Wallace: The Dunfermline Society. telling us one thing and you are telling us something Mr Coles: That is the only one, no other building diVerent, obviously that is a slight cause of concern. society is in receipt of any taxpayer support. I understand two of my colleagues want to declare Mr Hester: Government guaranteed funding. an interest that is probably best while you are here. Mr Coles: Government guaranteed funding is— Mr Carmichael: I am not sure if it is strictly speaking Mr Hester: Taxpayer support. a declarable interest, but for the avoidance of doubt and in the interests of completeness I should make it clear that I am actually a customer of RBS. Q683 Chairman: No fighting amongst the panel, David Mundell: So am I. please! Mr Thorburn, did you want to make a Mr Wallace: I am a customer of the RBS Group. comment? Mr Davidson: I think I was once, but I am not sure Mr Thorburn: Just for the record on one particular if I still am. Any other confessions? Thank you very thing that has been discussed but I was not invited much for coming along, it has been very interesting. to answer. Thank you. Processed: 12-03-2010 18:53:35 Page Layout: COENEW [SO] PPSysB Job: 439642 Unit: PAG6

Scottish Affairs Committee: Evidence Ev 105

Wednesday 9 December 2009

Members present: Mr Mohammad Sarwar, in the Chair

Mr Ian Davidson Mr Ben Wallace Mr Jim McGovern

Witness: Mr Archie Kane, Group Executive Director, Insurance, Lloyds Banking Group, gave evidence.

Q687 Chairman: Good afternoon, Mr Kane. I am Lloyds Banking Group. Our registered head oYce is really sorry on behalf of the Committee to keep you on The Mound in Edinburgh. We hold all our annual waiting but sometimes there are issues that we have general meetings in Scotland. We are one of the to agree in the Committee. I really apologise for this largest private sector employers, with more than inconvenience. I would like to welcome you to 20,000 colleagues, and a large number of our brands today’s evidence session. Could you please introduce are located there, including Bank of Scotland, yourself for the record? Scottish Widows and SWIP.1 As the director with Mr Kane: Yes, thank you, Chairman. My name is board responsibility for Scotland, I established the Archie Kane and I am the Group Executive Director Scottish executive committee which meets monthly, of Lloyds Banking Group, responsible for the bringing together senior executives at managing insurance division and also the main board director director level across all areas of the business. Despite responsible for Scotland in the Lloyds Banking all that has happened in the last year or so, I believe Group. that Scotland’s financial sector still has a strong international reputation. We have to bear in mind Q688 Chairman: Since you last gave evidence to the that the financial sector is not just banking and that Committee things have changed. Would you like to other areas such as insurance and asset management update us on what has happened during this time? have come through the recent crisis in very good Mr Kane: Certainly, thank you. First of all, I would shape. At Lloyds Banking Group we are doing all we like to thank the Committee for inviting me along can to restore and rebuild the reputations of those today. Since we last met Lloyds Banking Group has great Scottish brands we have under our taken a number of important steps towards stewardship. Chairman, I would be happy to take rebuilding the group as a stand-alone business and questions. very recently we announced a significant capital- raising programme which was approved at a recent Q689 Chairman: Thank you. You mentioned in your general meeting and is now well underway. We have opening remarks your agreement with the European also reached an agreement with the European Commission to sell oV part of the business. What Commission on divestments and we are well impact do you think it will have on Scottish jobs? advanced on an integration programme, which is one of the biggest the country has ever seen. With Mr Kane: There is a portfolio of businesses that we regard to integration I would like to say just a few have been asked by Brussels to put together for things. Firstly, I fully understand that as we bring disposal. Those are primarily Lloyds TSB Scotland, these two businesses together, staV at Lloyds Intelligent Finance, Cheltenham & Gloucester and a Banking Group face a diYcult and challenging time, range of branches throughout England and Wales. and it is our aim to keep them informed as much as As far as Scotland is concerned the main impact is in possible and also to engage in a constructive way Lloyds TSB Scotland and Intelligent Finance. The with the unions involved. We have also had a main impact by way of numbers is clearly Lloyds number of meetings with the Finance Sector Jobs TSB Scotland. The last time I appeared before you I Taskforce in Scotland. Up to the end of October, think I explained that our plan was to merge Lloyds approximately 1,000 roles have gone in Scotland as TSB Scotland into the Bank of Scotland, so we were part of our integration programme. We are doing going to do away with Lloyds TSB Scotland as a everything we can to reduce the number of roles brand and it was going to become part of the Bank aVected and keep them to a minimum through of Scotland and we were going to rationalise and utilising fewer contractors, redeployment of staV, deploy both of those organisations as one. retirement and voluntary redundancy.In some areas, Subsequent to the agreement with Brussels, that is notably group operations and insurance for not now going to happen. Lloyds TSB Scotland will example, we have been able to give our colleagues stay separate and it will become part of this disposal some high-level detail on the outlook right through process that we will go through, which means that to the end of 2010. In those areas we believe the the jobs in Lloyds TSB Scotland will stay as they are. changes we are proposing will lead to a reduction of We have up to four years to execute the disposal and around another 500 roles in Scotland by the end of the subsequent manifestation of what will happen 2010. I have to say, however, this is a two to three- will very much depend on who acquires Lloyds TSB year programme and we are just short of a year into Scotland and the other parts of that portfolio. the programme so there will be more announcements to come. Scotland plays a very significant part in 1 Scottish Widows Investment Partnership. Processed: 12-03-2010 18:53:35 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG6

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9 December 2009 Mr Archie Kane

Q690 Chairman: In early November, Lloyds Chairman said to you earlier, what further job losses announced that there would be a further reduction do you expect and when will announcements stop? I of 1,000 posts in Scotland and that would likely know you are referring to non-filling of vacancies, et mean 500 job losses in total. Could you update us on cetera, but I must say I have never heard an the process of redundancies and the latest numbers? expression like “natural attrition”. It sounds like an Mr Kane: I mentioned in my preamble that by round oxymoron to me, a bit like “reasonable legal” fees or about October 1,000 jobs had gone through the “military intelligence”. When do you expect the job process and, as you rightly say Chairman, 500 jobs loss announcements to stop? were announced in November which looked forward Mr Kane: As far as the integration goes, as I through until the end of 2010. That was primarily in explained, it is a three-year programme and we will the areas of insurance and group operations. The be making announcements throughout that period, reason we did that is the projects in those areas had so obviously as we go into the second year you would reached the stage whereby there was suYcient expect it to peak and then gradually the number and certainty to be able to identify what was going the amount in the announcements to decline. When happen and to be able to discuss with the unions and I say natural attrition, what I mean by that is people with the staV as to the impact that it was going to decide they either want to change job, to do a have in particular parts of the business. That brings diVerent job, leave the company, emigrate. There are the total to 1,500 jobs in Scotland. As I have said, many, many reasons why people leave their jobs. there will be further announcements as we go Perhaps they have a family and they decide they forward. There will be other parts of the want to stay at home and look after the family.There organisation, the wholesale bank, the retail bank is a natural level of turnover where people decide to and so on and so forth, and certain other areas, leave the company and that happens all the time. which as they get their projects to an appropriate What we try to do is capture that as much as point will then be able to announce further impacts possible. on jobs.

Q691 Chairman: Mr Kane, do you have the Q695 Mr McGovern: How would you characterise breakdown of these 500 job losses? How many will the organisation’s relationship with the trade unions be voluntary redundancies and how many out of at the moment? those will be compulsory redundancies? Mr Kane: We have three trade unions. We have Mr Kane: I cannot give you a breakdown because we Lloyds Trade Union, which is the biggest one, we have to work our way through those particular jobs. have Accord, which is the old HBOS trade union, The way that we approach it is that initially we look and we have Unite. They do have slightly diVerent for vacancies, i.e. where people have left through agendas but, by and large, we have, I would say, a retirement or natural attrition, and we do not replace good professional relationship with the unions. They those jobs, so that helps solve some of the problem. are fully involved in all issues to do with the We then look for redeployment of staV into other integration. There are weekly meetings with each of areas and there are other areas which will be looking the unions and I would say there is a good level of for staV because of retirement, natural attrition and communication. Clearly from time to time there are so on and so forth. Then we go to voluntary diVerences of opinion with the unions as to how redundancy and only as an absolute last resort do we things are being implemented but, by and large, I go to compulsory redundancy. would say generally speaking it is a professional and adult relationship. Q692 Chairman: So you have no idea how many will be compulsory? Q696 Mr Davidson: Can I clarify whether or not you Mr Kane: No, not of the 500. I do not have a have been briefed on the evidence that we had last breakdown of how that will eventually manifest week from Unite? itself. What I can tell you is in terms of the 1,000 who Mr Kane: Yes I have, I have read the evidence. have already gone into the process, just under 10% have ended up in compulsory redundancy. Q697 Mr Davidson: Certainly the evidence that we Q693 Chairman: Can you assure us then that every were getting from Unite does not seem to eVort will be made that there will be minimum corroborate the points that you are making there compulsory redundancies? about it being a constructive relationship. We very Mr Kane: I can absolutely assure you that every much got the impression that they felt that the eVort will be made. We will continue to do what we employers in banking were not being as helpful as are doing and we regard compulsory redundancy as they might in terms of sharing information and a last resort, and not an attractive one. genuinely co-operating. Mr Kane: I could not speak on behalf of the unions Q694 Mr McGovern: On this same subject, Mr as to what they had in mind but, as I said, we have Kane, we appreciate that initially the merger three unions and we have to deal with all three happened very quickly and it takes time obviously to unions and the two biggest are LTU and Accord. We work these things through. However, that is a year treat all of them the same and from the employer’s ago now and it certainly feels as if the insecurity that point of view we believe we have a very open and the staV feel has been very drawn out. As the regular dialogue. It is not intermittent, it is Processed: 12-03-2010 18:53:35 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG6

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9 December 2009 Mr Archie Kane absolutely regular, and we have constant meetings the board of Lloyds to talk about remuneration and with them. As I said, from time to time there may be bonuses in the same way that it clearly has with diVerences of opinion but ’twas ever thus. RBS? Mr Kane: I cannot speak for RBS so I am not Q698 Mr McGovern: When you say Lloyds Trade entirely sure what has taken place. When we say the Union, is that an in-house works council type of government I think we are talking about UKFI thing or is it an independent trade union? because they are the investor acting on behalf of the Mr Kane: It has developed out of an in-house staV Government. I am aware that discussions do take association in the same way that Accord was the place between UKFI and the chairman of the HBOS in-house staV association, but each is remuneration committee of Lloyds. That has taken recognised and given full recognition as a trade place in the past. union and they rank pari passu. Q704 Mr Wallace: Has it taken place recently on the Q699 Mr McGovern: They are not independent subject of bonus payments? trade unions? Mr Kane: I honestly do not know. I know there is an Mr Kane: They do not operate outside of our on-going dialogue and there are meetings between organisation. Unite does because that is a very large the chairman of the remuneration committee and union that covers many companies. UKFI. I cannot really inform you of whether there has been a specific meeting since the RBS issue. I honesty do not know. Q700 Mr Wallace: Welcome, Mr Kane, and thank you for coming back. Obviously you cannot have missed, while waiting for our Committee, the Q705 Mr Wallace: Could you write to the announcement today of a windfall tax on bonuses. Committee to let them know whether UKFI have Was the board planning to pay bonuses at that level had those discussions with either the chairman of the to a number of people who may be aVected by this remuneration committee or other members of the tax that has been brought in? board and what Lloyds Bank’s position or answer Mr Kane: You are talking about 2009 bonuses has been to the request on bonuses? payable in 2010? Mr Kane: I am happy to write to you insofar as I can, yes. Q701 Mr Wallace: Yes. Mr Kane: The board does not sit and decide on Q706 Mr Wallace: On the announcement today of bonuses. It is a sub-committee of the board, the the bonus tax, I am acutely aware that within banks remuneration committee that addresses the there are certain parts of banks that are keeping remuneration of executive directors and the very them afloat. In some banks with an active trading senior members of staV, and that committee still has division it is the traders that have actually been to meet and decide what level of bonuses they would making some of the profits. As you will know, consider appropriate in the circumstances. That will trading teams are highly competitive and they get be based on performance, both individual and bought and sold around the world for what they add company performance, and there is a standard in. In Commerce Bank there is a court case going on process that they go through. That committee is between a group of traders where bonuses have been made up of independent non-executive directors. withheld. There is a perception out there that There are no executives who are members of that bonuses are bonuses are bonuses. A bonus for a committee. person working behind the till which enhances what is a fairly meagre wage is a very diVerent type of bonus to a City financier’s bonus where their basic Q702 Mr Wallace: Last week we had RBS in here is, let us say, £100,000 but their bonus can be many, and almost minutes after the meeting came the news many per cent more, not 50% of it but it is everything that they had received advice that they would resign to them in a sense. Those are two diVerent types of en masse if the Government used its share to block bonuses. Do you have the latter group within the bonus payments. I am aware obviously that the Lloyds Group? How much of your money is coming Government does not have a majority holding in from the traders as opposed to the retail banking? your bank as it does in RBS. What is the feeling on Mr Kane: We are not really involved in the your board about the Government trying to ban you heavyweight end of investment banking. We are paying bonuses to the very top? much more a commercial and retail organisation, so Mr Kane: I am not aware of any discussion of that we are not exposed to the same extent as some other nature taking place between the Government and people are who have very large and heavy the Lloyds TSB board. As I say, we have yet to go investment banking operations, so we are diVerent through the process of deciding what bonuses, if any, to that extent. Nevertheless, we still have a number would be applied. of very highly skilled people who do receive a reasonable proportion of their total remuneration in Q703 Mr Wallace: When you say you are not aware bonuses, so therefore they would be caught up in any does that mean you are on the board and you have schemes that were proposed. We have agreed, as never heard that those discussions have taken place have the other four major banks in the UK, that we or that you have not had discussions directly will comply with the G20 recommendations and the yourself? Has the Government been in touch with FSA recommendations on bonus payments, so in Processed: 12-03-2010 18:53:35 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG6

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9 December 2009 Mr Archie Kane other words that means that if bonuses are paid to where organisations like ourselves are people earning more than £39,000 it will be a disadvantaged we would be under the threat of maximum of £2,000 in cash and then the bonuses losing staV, and that is of grave concern to us. will be deferred over a period of three years and they will be payable in stock. Q711 Mr Wallace: Just finally, that is the top end. At the lower end people on a lower wage who get incentive bonuses, reward bonuses for signing up to Q707 Mr Wallace: The other G20 recommendation schemes, et cetera, is it still your intention to pay is a major shift from variable awards to fixed, e.g. those? There has been no suspension across the from bonus to salary. The easiest way round this board? Someone on £23,000 still has the potential of gimmick that was announced in the PBR is that getting a bonus at the end of that year? banks will just double or treble people’s salaries. Mr Kane: If people are on sales schemes, that is not There will be no windfall tax because they will not included within the restrictions and the have a bonus, and in doing so they will comply with recommendations. If people are earning below the G20 recommendations that bankers’ £39,000, they are excluded, they can get a cash award remuneration should be fixed and not variable. Do up to a certain limit. There is no intention to restrict you think it will be a surprise the number of banks those people, so people in branches and people who choose to just get round it by deciding to have working in admin centres who are paid of that order more salary and less bonus? will still be getting bonuses based on performance. Mr Kane: I am aware that there has been mention in Mr Wallace: Thank you. the press of increasing salaries in certain organisations. I am not aware of significant proposals to increase salaries in the order of Q712 Mr McGovern: Could I just ask Mr Kane, magnitude that you just described. when you say bonuses will be paid for sales schemes, what is it that banks sell? Mr Kane: Banks sell products to customers. Q708 Mr Wallace: Barclays Capital have. Mr Kane: Barclays Capital have been in the Q713 Mr McGovern: Products? newspapers and clearly have a particular view but Mr Kane: They employ large numbers of sales Barclays Capital is a very large investment bank. people like virtually every industry does, so we sell current accounts, we sell credit cards, we sell insurance products, we sell mortgages, and we have Q709 Mr Wallace: I think the point is that you have a significant number of sales people and we reward to service your shareholders, keep talent, to make and remunerate them accordingly, in the exact same the bank profitable to get out of all the other issues, way as if those people were working in any other but at the same time satisfy the public demand that industry and selling products of that industry. a taxpayers’ bank should not be paying large bonuses to people. In any tax scheme people do their best to minimise their tax liabilities. It seems fairly Q714 Mr McGovern: So if I go into a bank and open obvious that you can comply with G20 an account I have purchased that, have I, I have been recommendations and that this windfall tax will not sold it? actually materialise. Of what you have read of the Mr Kane: We operate in a very competitive market windfall tax, do you think it is likely it is going to place and there is a range of institutions out there raise the money that is suggested? and we have to try to compete with all of those Mr Kane: I only just heard about it before I left the institutions. For example, in the savings investment V oYce to come here so I really have not given a great market, there are in excess of 100 di erent deal of thought to the implications and the impact it competitors in the UK right now selling products in is going to have. The one thing I would say is that if that savings and investment space. In order to ensure organisations—and this applies to any significant that we compete not only do we design product and bank—cannot pay competitively, there is a high price that product competitively but we have a chance it will lose key staV. I do not think there is any trained and focused sales force which is in the doubt about that. business of taking those products to market, in exactly the same way that every other financial institution does. Q710 Mr Wallace: Have you lost key staV over the Mr McGovern: I will have to bear that in mind that last year? you sell me an account; when I open an account you Mr Kane: We have lost some staV in recent times. If have sold me it. I can talk about my division, which is the insurance division, we are clearly part of the banks, so we are Q715 Mr Davidson: Can I just pick up this point aVected by all this. Competitive insurance about the pressure on the lower paid staV. I think companies are not currently aVected by all this so you have seen the evidence that we had last week, you can see a clear negative impact, and therefore again from the unions, where they were indicating there is a risk of our employees moving to insurance that they thought that the culture of being sales companies who employ a significant number of driven had not changed at all in the bank, and we highly skilled people—actuaries and accountants were hearing stories of how staV were being and so on and so forth, who reap very, very performance-managed out the door if they were not handsome rewards. Clearly if it comes to the point achieving targets and of staV actually having to buy Processed: 12-03-2010 18:53:35 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG6

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9 December 2009 Mr Archie Kane the products themselves in order to keep their jobs. there is a failure to meet the targets on the balanced Given the economic circumstances, are you not score card, we go through a process of counselling relaxing targets in any way? and coaching with staV and performance Mr Kane: Targets change constantly depending on improvement programmes and our objective is to try the economic circumstances and the competitive to get people back on to performing well. It is in the environment in which we operate. For example, we interests of the individual and it is in the interests of have reduced the level of share of voices, as it is the company as a whole. As far as people buying known internally, in terms of lending, from about products themselves, people can buy products for 30% weighting down to 20%. We have increased their own use. I have a number of products with the deposits on savings from a 20% weighting to a 30% organisation. weighting, in other words, relatively, savings and deposits have increased in terms of the weighting Q719 Mr Davidson: Of course they can, I and the targets and the lending has reduced, in the understand that. retail bank, to consumers at large. We constantly Mr Kane: We have a very stringent measurement of review and change the level of targeting. In forming products that individuals are selling and also the those views we take into consideration the economic shape of the products in particular parts of the environment and we take into consideration the organisation, in a particular branch or in a strategy, where we want to take the organisation, in particular area, and where there are any unusual which direction, and we also take into consideration statistics coming out we have teams of people that go the competitive environment within which we in and investigate those problems. We also have help operate. lines for the staV if they believe that they are coming under any undue pressure, particularly to do with, Q716 Mr Davidson: What I find diYcult about your let us say,over-zealous managerial pressure. We have answer is that it seems to be entirely contradicting a number of measures and procedures in place to the evidence that we got last week. You also told us make sure that sales are done properly, they are done that you thought you had good communications to suitcustomer needs and they are not done in an with the unions. In fact, we got a quote last week inappropriate manner. from one of our witnesses that said: “StaV are still required to sell the same type of products to the same Q720 Mr Davidson: Again, can you understand why 2 level . . . ” You are contradicting that. Why is it that I have a bit of diYculty in accepting what you are representatives of the union do not seem to be aware saying when I heard entirely contradictory evidence of the change in policy? from the unions? The STUC told us that if staV do Mr Kane: That is a question that you would have to not sell these products they will find themselves put to the unions, but they are totally aware because performance-managed into unemployment. That we discuss all of these with the unions, and we does not seem to gel with the caring approach that constantly move, not on a daily basis but as we go you are outlining to me just now. through— Mr Kane: I can tell you that performance-managing people into leaving the company, it does happen, but Q717 Mr Davidson: I understand that. I have to say it is a very,very small number of people. Mr Kane: —quarterly and six monthly and yearly Normally if it does happen it takes a period of nine and we are changing our targeting and months because we go through a performance incentivisation programmes. improvement programme, counselling processes and continually work through it, but in terms of the Q718 Mr Davidson: I do find it a cause for anxiety network in Scotland, I would have thought in 2009 that they do not seem to be aware of it. What about we are talking of a very,very small number of people, the point that some of your staV are so afraid of probably single digit numbers—very, very small. being performance-managed out the organisation that they are having to buy themselves the products Q721 Chairman: Mr Kane, businesses in our that they are meant to be selling? constituencies are telling us that banks are charging Mr Kane: Let me say that we do use performance unreasonably high fees for finance applications and management. The whole organisation is renewals, and renewed finance is being oVered on far performance-appraised. I am performance- less favourable terms than previously. Are good appraised. I have to go through a regular businesses being used to raise money for ailing performance appraisal against my objectives. We use banks? a whole set of balanced score cards. Some of it is Mr Kane: As you are probably aware, we have financial, some of it is sales, some of it is to do with undertaken with the Government to provide risk and risk management, some of it is to do with additional lending to the amounts we have provided customer service and some of it is to do with people in the past. As far as Lloyds Group is concerned it is management, and everyone in the organisation is some £14 billion this year and then next year, so there performance-appraised against that, including the is £28 billion of additional lending. That basically chief executive at the very top of the organisation. splits down to £3 billion in mortgages and the rest is Where people fall below their balanced score cards, in corporate, mid-level and the SME sector. We are and this is not just on one specific point but where actively engaged in providing and we have committed and signed up with the Government to 2 Q 550 endeavour to make that lending. In terms of margins Processed: 12-03-2010 18:53:35 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG6

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9 December 2009 Mr Archie Kane and fees and the pricing of the products, we have so we will do the same, another 200 seminars. We published our SME charter. I am talking about understand that there might be a perception out businesses up to the level of £15 million per annum there. turnover when I say SME. In that charter we have said that we will not increase our margins, and we Q723 Chairman: Some of the customers of HBOS in have not increased our margins over the last year, my constituency have brought to my attention the other than in the case where the operational risk and fact that they had a long-term deal with them with the credit risk of that business has changed. If it has whatever interest charge and commitment fee and changed, then we will reserve the right to change the overdraft facility, but then when they go to the bank margins. We have also said that we will not increase when they want to expand or they want to buy a new our fees. Over the period of the last 18 months or so business and they ask for more money, the bank is the actual amount charged has gone down because insisting—and all of the banks are the same—that base rates and all of the rates have gone down, but the previous arrangement has to be changed before we charge margins over base rate and LIBOR they can extend them more overdraft facilities or depending on the type of product and we intend to loans. abide by that charter.3 The actual amount paid has Mr Kane: Let me explain an important point here. gone down and we have undertaken to maintain our Lloyds Banking Group is using the credit approach fees and maintain our margins provided that the and the risk management approach of Lloyds TSB. businesses do not deteriorate in terms of their It is not using the approach that HBOS used in the credit quality. past. HBOS did get itself into diYculties. We do not intend to go down the same route. What that means is that there will be certain customers who do not fit Q722 Chairman: Last week you told the Scottish into our credit appetite. We have those customers. Parliament’s Economy, Energy and Tourism What we are doing is trying to work through with Committee that demand was low for business those customers to try and find a solution to the lending. Is this demand low because the products problem, to try and find a way out of the problem, V and terms on o er are, frankly, unattractive to the but there will be some existing customers and businesses? potentially new customers who come to us who do Mr Kane: As you quite rightly say, Chairman, I did not meet the credit appetite and the risk appetite that say last week that we found our application rates we have and they will, in certain circumstances, be dropped by 20% year on year, particularly in the turned down. When I said we had the conversion SME sector. Our conversion rates are the same. In rate of 85% that means that 15% of applications are fact, they have recovered to the highest level they being turned down. That is unfortunate but that is have ever been at. They are at about 85% now. That the realistic situation. means of the applications that we are getting we are converting those applications into facilities, i.e. Q724 Chairman: Mr Kane, I am not talking about loans, at the rates that we would have seen at the best the customers where there is a risk; I am talking times, if you like. We were concerned that about the customers who have enough equity in their particularly in the Bank of Scotland on the HBOS property that they can aVord a new business but they side of the business that perhaps people thought that cannot go to a new bank because equity is tied up we were not extending lending and there was a good with the present bank. So then they are asking them reason for perhaps people believing that. In the latter for a bigger overdraft facility and more loans and half of 2007 and into 2008 HBOS basically withdrew what the bank is saying to the customer is that they from the market and the reason it withdrew from the have to change the existing arrangements because market is that it ran out of funds and liquidity. It just what they are saying is they are losing money. If did not have the money to lend. Therefore, there was somebody has agreed that they will pay 1% or 1.5% the possibility of an understandable perception more than the base rate the banks are claiming that building in the minds of small business people that they are losing money and they cannot aVord to lose “there is no point in going because they are not going money so they want to charge them higher interest to give me the money”. In order to try to combat rates and they want to change their present that, we have contacted telephonically and we will commitments. have contacted by the end of the year all of our Mr Kane: As I have said, we have laid out in our existing customers to let them know that we are open SME charter that we will not change the fees for for business and that we are interested in helping existing customers and we will not change the them with facilities through the very, very diYcult margin and the pricing for existing customers unless times. We have also run some 200 business banking their credit situation changes. If it does change then seminars throughout the country. The objective of the pricing will change to reflect the risk. Prior to the that is to explain to people first of all that we are financial crisis we were in a world where money was open for business and we are lending, secondly, how freely available and it was freely available at cheap we are going about it and how the fees and the rates. I have to say this is not peculiar to Scotland or pricing structure works, and also how we can help the UK; this is a global phenomenon. I believe that them get through the diYcult period that the that world has gone and it is not going to come back. economy is in. We will continue to do that next year, There are a number of reasons for that. Regulators are going to insist on much more risk management 3 London Interbank OVered Rate. and a much more risk-based approach to pricing, for Processed: 12-03-2010 18:53:35 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG6

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9 December 2009 Mr Archie Kane example, and regulators are also going to insist that Mr Kane: There are circumstances where they may increased levels of capital are applied against the find that they would have been able to get funds on various risk sections of a business. What does that a particular basis or been able to get funds, period, mean? That means that lending will have to be from HBOS in a diVerent environment, which they (amongst other types of business but lending is the may not be able to get from Lloyds Banking Group obvious case in this point) very carefully evaluated, because we have a diVerent risk management so if the issue is individual clients could get money at approach and a diVerent credit approach. We are not a particular price and with particular arrangements going to make the same mistakes that HBOS made. in the past and that has now changed, I think that really is a reflection of the times in which we find Q728 Mr Davidson: Can you understand the anxiety ourselves. about charging levels when lawyers, who know a fair bit about high charges, come to us and complain Q725 Chairman: Has the definition of a viable about high charges being levied by the banks and business changed since this time one or two years they seem to be suggesting that again this is being ago? increased much more than it was before? Again, is Mr Kane: From Lloyds TSB heritage I can tell you there not a question of perception and categorically no. A viable business is still a viable communication here between yourselves and the business. What has definitely changed is from the Federation of Small Businesses and the Law Society HBOS side of the business we now apply a risk and others who act on behalf of small businesses? management approach and a credit approach that is Mr Kane: I think there definitely has been a diVerent from the one that HBOS applied perception issue over the last year, particularly when heretofore. the financial crisis hit. There is no doubt that there was a general perception that the banks were not lending. If you take HBOS, for example, as I Q726 Mr McGovern: Just on a similar subject to mentioned earlier, HBOS just stopped lending. It has what the Chairman was saying, we have heard that taken us a bit of time to get it fired up again and open businesses have been presented with unreasonably for business. The Bank of Scotland is now open for high fees for finance applications and renewals, and business and it was closed to business; it was not renewed finance has been oVered on far less lending any money because it did not have the favourable terms than what they would have been money to lend. In order to do that we have had to previously, so again the same question: are good build the pipeline back up again so we are actually businesses being used to raise money for the banks? increasing the lending. On that subject, can I just say that I have only been an MP since 2005 and for the first four years people Q729 Mr Davidson: I understand all that. So you are that came to my surgery would have the usual saying that if we speak to the Law Society and the complaints which would be about immigration or Federation of Small Businesses again in a month or tax problems or pension problems, but in the past six so they will tell us that things are much better, will months, maybe nine months, I have had an they? increasing number of business people coming to my Mr Kane: I honestly cannot put words in the mouth surgery saying that the banks are letting them down. of other people, that would not be appropriate for I do not mean new businesses. Some of them are new me to do, but we are out there trying to lend money businesses who are having problems with banks but to good viable businesses; that has not changed. some of them are people who have had a 25-year relationship with either HBOS or RBS and suddenly Q730 Mr McGovern: You are also approving more find that the banks are treating them much more loans for new businesses? harshly than they did previously. Is that a fair Mr Kane: Yes, and new businesses as well. We have comment? a target to increase our lending to new businesses Mr Kane: I think it is fair to say that the environment and we are actively engaged in new start-up has changed, but I would repeat we have undertaken businesses as well. In fact, I believe that we are to lend £14 billion more this year and next year so amongst the leading and probably are the leading £28 billion. We have undertaken to seek to do that bank in the UK in financing start-ups so we are with the Government. We are in the business of actively engaged in that market-place. actually lending additional funds and we are increasing our lending. The approach that we take is very much the traditional Lloyds TSB approach to Q731 Mr Wallace: On that because it is quite it, which is diVerent from the HBOS one, so important, Mr Kane, you said you did not want to therefore I could envisage in certain circumstances repeat the mistakes of HBOS and to my hon friend, particular businesses who find themselves in a the member for Dundee, you replied that it was a particular position who would have got funds under product, and I think we all know that you sell the old HBOS rules who may find it slightly diVerent products. The banks use pricing to get rid of people under the new Lloyds Banking Group rules. That they do not want—those who are high risk, unviable, will happen in certain circumstances. not profitable. Banks are in a race to make themselves profitable and so using your own projection of what you think the future market will Q727 Mr McGovern: So when you say “slightly look like, with regulators requiring a higher degree diVerent”? of insurance in capital/deposits, et cetera, is Lloyds Processed: 12-03-2010 18:53:35 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG6

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HBOS in the business therefore of trying to get rid of Q734 Mr Wallace: Have you (a) started to change some of those HBOS customers that are not making that and (b) what was the diVerence between the them any money and that are only going to fall down HBOS model that you in eVect inherited and the in the future as regulators require less risk in the Lloyds Halifax model? system? Mr Kane: We were never in excess of 100%, the Mr Kane: Let me explain what we do with 125% Northern Rock-style mortgages. That is not customers who find themselves in diYculty. If I take part of the market in which we played. We thought the SME side and the corporate side, we have a it was too risky. We did not think it was business support unit, and it is staVed with 1,000 appropriate. people. We have doubled the number of people in it this year. People are transferred into the business support unit, and this will be SMEs and mid- Q735 Mr Wallace: As in Lloyds did not? corporates who hit problems. The objective of the Mr Kane: Lloyds did not, Lloyds and HBOS were similar in that respect. They might have had slightly business support unit is to work with those V V businesses and to return them to business as usual di erent cut-o points and so on. We were in the and pass them back into the mainstream banking 100% levels but now we are in the 90% levels. It operation. That is the objective, so a number of depends on the profile of the customer, what level HBOS clients will find themselves in that business they are at in terms of the size of the house, the support unit. Our objective is to try to return them type of the house, the customer, the profile of their to good health. At the end of the day we are in the income. There is a whole scoring mechanism that long-term relationship business. We are not they go through. If you are asking have we pulled interested in having customers for short periods of back, yes, the answer is we have slightly pulled back time. We want our customers, be they retail or be in our loan to values and the whole market has they companies and businesses, to be with us for a pulled back dramatically. In other words, if you very, very long time, and we want to price through went back to the first half of 2007 when Northern the cycle, so we want to be able to price product Rock had something like 25% of the market, you could get 100% up to 125% mortgages. You would and provide service so that through the good times Y and through the bad times we can still maintain the find it virtually impossible or extremely di cult to relationship with the customer. That is our strategy get that now. and that is what we implement into the market- place. There may be certain customers who because Q736 Mr Davidson: Can I pick up the point about of their business model or operating model get people who get into diYculties with their themselves into diYculty and the operating model mortgages. Has your figure for repossessions gone is simply not viable. In those circumstances, where up at all? we cannot through the business support unit find Mr Kane: Our repossessions have gone up slightly a solution, then it may be that we part company but not dramatically. Our arrears have increased one way or another. but our repossessions have not gone up anything like our arrears. We have certain procedures in Q732 Mr Wallace: That leads into the subject of place that when somebody gets into diYculty, and mortgages. What is your proportion of mortgages we can spot it because you can spot the missing of agreed to in Scotland compared to the rest of the the repayment, we immediately proactively contact United Kingdom now? Are you giving more or less them. We find out what the problem is. Sometimes as a proportion in Scotland? it is simply an error—a standing order has gone Mr Kane: I do not have the actual breakdown of missing or something—but if it is not and the client mortgages in Scotland but we are a big mortgage is under duress, has lost their job, or fallen onto lender in Scotland, particularly through the Halifax hard times for any reason, we try to find a way of Bank of Scotland operation, but Lloyds TSB helping that customer through the diYculty. In Scotland is also a reasonable player in the mortgage terms of repossessions, we would not even consider market in Scotland. As I said earlier, we have instigating any repossession activity until a committed to lend £3 billion in each of two years minimum of six months had passed, and the in addition to that which we were previously average is usually much longer than that. We lending, so we are very active in the mortgage engage in a process of discussing with the customer market and particularly in Lloyds TSB we grew our and trying to find a way of rescheduling their percentage of the mortgage market in recent times, payments to get them through the diYcult period. so we are an active player in the mortgage market. As you know, we own Halifax now, which is the Q737 Mr Davidson: And that would include the premier mortgage lender in the country, in the possibility of shared equity stakes, would it? whole of the UK, so we have a very, very big focus Mr Kane: That is something that we are looking at on mortgages and we intend the mortgage market at the moment. Shared equity is not a mainstream to be a key product market for us going forward. activity but it is something that we are looking at. We are looking at all opportunities that are Q733 Mr Wallace: Have you significantly changed available. Basically if somebody has bought a the proportion of capital to mortgage? house and let us say they have borrowed 70% or Mr Kane: Loan to value I think you are talking 80% and they are in what would appear to be short- about, yes. term diYculty, we would rather reschedule, get Processed: 12-03-2010 18:53:35 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG6

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9 December 2009 Mr Archie Kane them back on track and get them back to the and the times that the facility will be open to receive position they were at before. That is our primary calls. We have changed a number of our procedures objective. by listening to those comments.

Q738 Mr Davidson: That is very helpful. In terms Q742 Mr Davidson: That is all within the year, is it? of dealing with your customers and clients, there Mr Kane: They have been done at diVerent points was quite a lot of criticism of the banks from but over the last year or so we have put a number Citizens Advice Scotland, which you will have seen. of changes into our systems. Do you think those criticisms were fair? Mr Kane: I am not quite familiar. Is this to do with Q743 Mr Davidson: I certainly had one particular the mortgage market in particular? case of which I was aware where they were saying that they were getting repeated calls from what Q739 Mr Davidson: No. It was really quite a large seemed to be an overseas call centre and the people number of things. The suggestion was that, involved did not seem to be aware of other amongst other things, you were using silent phone discussions that had taken place. When my calls, unfair overdraft charges, using the right of constituent tried to explain that they had been “set oV” to use benefits payments to pay oV credit speaking to somebody else they then had cards, encouraging customers to take out more communication diYculty with the individual products to pay oV existing debts, and that some involved who clearly had only been programmed to of your staV were pursuing customers who were in take payments or to pursue payments and did not diYculty somewhat vigorously, including in many have any authority to have any dialogue at all. cases not accepting arrangements that had been Mr Kane: I am not aware of the particular case. reached and continuing to pursue for additional Generally our approach is that all customer contact payments. They were in some cases refusing to deal should be done from UK land-based units. We have with intermediaries such as citizens advice bureaux a number of overseas administrative centres, but or agencies that had been appointed by the people certainly—and I can talk in detail about Lloyds involved; a general litany of bad behaviour. Do you TSB—we did move a call centre oVshore many recognise any of that as being practised by years ago. We believed that it did not work, it was yourselves? not in the interests of clients and we had Mr Kane: I certainly recognise Citizens Advice operational issues with it, and so we shut that down Scotland’s comments because they are publicly and we moved it all back on to UK-based call available. If I can take for example debt counselling centres. Our strategy is that if you are going to and debt collection, so in other words the approach receive either face-to-face or telephonic that we take where people fall into arrears on, say, communication as a customer you will get it from their personal loans or their credit cards, we do a UK-based land site or a call centre and not from have a debt counselling unit which is very much like overseas, to avoid the sort of problems that you are the business support unit in the commercial market absolutely right in identifying. and they do contact customers. On issues like silent calls we have instigated a set of procedures whereby Q744 Mr Davidson: What about the point about if a call is abandoned, that means a connection is not accepting representatives and continuing to made but somehow it falls over and the person phone the individual client or customer rather than would get a “silent call”, if that happens, from our their nominated representative? side it is an abandoned call because that is what we Mr Kane: Our relationship is first and foremost see, the systems are now programmed that we with the client so we deal directly with our client. cannot call that person back until 72 hours have If our client then says, “I want you to deal with my elapsed. That is one example of trying to address lawyer”, for example, then clearly we have to deal the problem. with the lawyer. But, generally speaking, our relationship is one directly with the client. Q740 Mr Davidson: Is that new? How new is that? Mr Kane: That is probably within this year. These Q745 Mr Davidson: Somebody who has multiple things do happen. I would not deny these things debts might have tried to get somebody else to happen. They tend to be the exception rather than bundle these up and deal with them on their behalf, the rule and they are definitely not planned to like Citizens Advice. We were told a fortnight ago happen. by Citizens Advice that frequently banks would then ignore the fact that there was a representative Q741 Mr Davidson: I understand it is not planned. and would continue, as they saw it, to harass the Mr Kane: When we hear of something like that individual client. Frequently I come across people happening we take steps to try and address the issue who find it very diYcult to cope. They have got where we believe there is a real issue, and in that themselves into a position and they cannot cope silent call issue that is what we have done. We also with the stress of it and they want somebody else have another set of procedures as to when you can to deal with it on their behalf. For them to be contact people. Now if we contact people we leave constantly pursued by an organisation when they a message on their answerphone rather than just thought it was being dealt with by CAB or another keep calling them back and on the answerphone we representative obviously causes them continual will leave a message leaving a telephone number stress and it gives the impression that that Processed: 12-03-2010 18:53:35 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG6

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9 December 2009 Mr Archie Kane particular agency wants, as it were, to jump the organisations as transparent and as visible as queue and make sure that they get their money first possible, and I think good work has to go on in before anybody else does. Is that acceptable? those areas—we do not want to go back to where Mr Kane: I am certainly aware that we deal with we were—but at the same time we have to make Citizens Advice Bureau representatives, and there sure that we accentuate and promote the positive, is an on-going relationship at the CAB. I do not and we have many, many positive things in think there is any strategy to not liaise with the Scotland. Not least is the skill base, the history and Citizens Advice Bureau or its representatives. the knowledge that has been built up over time, and I believe that the financial sector in Scotland is a Q746 Mr Davidson: So it should not happen then? strong one. It is going through some diYcult times, Mr Kane: I am unaware of the particular case that there is no doubt it, but I believe that we will come you are talking about. out of that and, if we do things properly, we will have a strong financial sector, and I would say that Q747 Mr Davidson: I accept that. Lloyds Banking Group is very focused on ensuring Mr Kane: Certainly repeated calls to the same that the Scottish economy comes out as best we can customer when there is an arrangement and a help it, because if the Scottish economy does well, discussion with CAB to try and operate on behalf we believe that Lloyds Banking Group in Scotland of the customer and the customer is having a will do well. If the Scottish economy does not do diYcult time is definitely not our strategy. well, then it will be harder for Lloyds Banking Group in Scotland to do well. Q748 Mr Davidson: If you have seen last week’s Mr Davidson: Can I just seek confirmation that evidence, then you will have seen the discussion we Lloyds is not run by Celtic supporters who are had with Mr Hester about lack of communication, trying to do in Glasgow Rangers based in my again, between his bank and CAB and the constituency? arrangements that we came to about the Mr McGovern: Can I just ask, when are you communication that would then take place. I actually going to pull the plug on Rangers? It presume that you would be willing to undertake the would make me happy. same sort of arrangement? Q750 Chairman: I think these are the most diYcult Mr Kane: Sure; certainly. questions! Mr Kane: Do you want me to respond? Q749 Chairman: You seem certain that Scotland’s V financial reputation will not su er as a result of Q751 Mr Davidson: Yes. HBOS and RBS failing so badly in the medium and Mr Kane: Normally we do not discuss individual long-term, and there are others who are saying client relationships. The Rangers Football Club is exactly the same thing. It seems to me that people clearly high profile, high media coverage and we are investing in Scotland. Are you able to identify understand the importance that Rangers has, not any factors behind the robustness that we should only in Glasgow, but right across the whole of be looking to strengthen and learn from? Scotland, and internationally it is an iconic brand. Mr Kane: First of all, I think Scotland has a very We have a facility with Rangers and, clearly, we are deep and wide skill pool relative to the size of working with them to try to ensure that Rangers Scotland in the financial services sector and, as I gets through the issues that it is facing at the mentioned earlier, insurance and fund management moment and comes out and is successful in the has a great and illustrious history in Scotland and future, but we do not interfere in the management in Edinburgh in particular, so we need to continue of Rangers, we have nothing to do with the to support and develop those areas. There is little management of Rangers, we do not appoint people doubt that the impact on the two major banks that to the board of Rangers and we want to try and were based in Scotland has had a negative impact make sure Rangers comes out of the position it is in terms of jobs, in terms of perception. I would say in, the same way we would treat any one of our that the perception that we have within the UK and clients. within Scotland tends to be much more negative than the perception when you go overseas. I go Q752 Chairman: Thank you, Mr Kane, for your overseas and people do understand that we have attendance. Once again, I am sorry that we started had problems, but virtually every jurisdiction late. Because of this, there are some questions we overseas has had problems. Therefore, I think we were unable to ask. The Clerk of the Committee are quite gloomy and negative ourselves. I would will put those questions to you in writing and we advocate that we are realistic, we learn from the would be very grateful if you could give us written mistakes that were made. Let us not kid ourselves answers to those questions. Thank you once again. on. Let us be sensible about it and improve Your evidence was very helpful for the Committee. regulation and improve risk management and Mr Kane: Thank you, Chairman. I would be happy improve the way that we communicate and make to respond to any written questions. financial products and the risk within financial Chairman: Thank you. Processed: 12-03-2010 18:54:09 Page Layout: COENEW [SO] PPSysB Job: 439642 Unit: PAG7

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Wednesday 13 January 2010

Members present: Mr Mohammad Sarwar, in the Chair

Mr Ian Davidson Lindsay Roy David Mundell Pete Wishart

Witnesses: Lord Myners, a Member of the House of Lords, Financial Services Secretary, HM Treasury, and Mr Robin Haynes, Head of Financial Services, Scotland OYce, gave evidence.

Q753 Chairman: Good afternoon and welcome to the seller to maintain the value of the assets, so I our evidence session. Could you please introduce believe that the impact on the provision of banking yourself for the record. services from the customer perspective in Scotland Lord Myners: Good afternoon, Mr Chairman. I am will be negligible. In the longer term, I think we will Paul Myners and I am the Financial Services see an opportunity here for the creation of new Secretary in Her Majesty’s Treasury. competitive forces in banking in Scotland, Mr Haynes: Good afternoon. My name is Robin particularly as a consequence of the disposal of the Haynes. I am the oYcial in the Scotland OYce with a Lloyds TSB branches in Scotland which will provide portfolio of interests which includes maintaining our an opportunity for a new entrant to come into the contacts with the Scottish financial services industry. business SME and private customer market in Scotland. Q754 Chairman: What assessment has the Government made of the likely impact of job losses Q756 David Mundell: Both the Royal Bank of on the Scottish financial sector as a result of the Scotland and the Lloyds Banking Group have told economic crisis? us that they will lose staV if they are unable to pay Lord Myners: The financial crisis has of course been them competitively. The Unite union, in their worldwide, and it is very important to stress that. evidence to us, told us that members saw little Although two Scottish banks have been very much intervention from UKFI to control pay awards, so in the headlines here, we need to remember that, as can you just clarify what involvement the Treasury far as banking is concerned, the impact on the has had in discussions with both banks about their business of banking and employment in banking has levels of remuneration? been a global phenomenon and there are other parts Lord Myners: UK Financial Investments is the body of financial services in Scotland which remain very, through which the Treasury administers on behalf of very strong, and I am thinking particularly of the taxpayer our investments in those banks in which insurance, fund management and asset servicing we have either been required to take a controlling activities. The impact in terms of employment in interest or to make a major investment. As far as the Scotland will be largely a function of the same shared Royal Bank of Scotland and the Lloyds Banking impact across the whole economy of a decline in the Group are concerned, UKFI is one of many volume of activity in the banking sector, which is shareholders and cannot operate as if it were the obliging banks to examine their cost structures and only shareholder or the controlling shareholder. their business practices, but also of course, with UKFI must give primary consideration to respect to the two principal Scottish banks, there will protecting the value of the taxpayer’s interest in the be some divestment issues which are involved as investment in those banks inasmuch as is consistent well, although those are unlikely themselves to lead with promoting financial stability and competition. to any immediate impact on employment prospects. Lloyds Bank and RBS have both carried out very fundamental reviews of their employment practices, Q755 Chairman: The Royal Bank of Scotland and including remuneration, over the last 12 months. the Lloyds Banking Group have to sell some of their UKFI does not get involved in the day-to-day branch networks, as required by the European management of these banks, but its focus in terms of Union Commission, in return for state aid. In your remuneration has largely been on high-level view, what will be the impact on the Scottish remuneration, those earning the largest sums which, customers? in the case of RBS, for instance, are largely in their Lord Myners: The Government fully supports the Investment Banking Division. I do not think that banks in their agreement with the European Union Lloyds or RBS have in any way been disadvantaged in terms of remedial action to reflect the in their ability to compete for talent and meet their consequences of state aid. These requirements for workforce requirements, be it at lower levels, and I divestment allow an extended period for think it is worth it, at a time when banking is often implementation of four years and require that the being bashed, to emphasise the point that the existing services and activities provided by the majority of people working in British banks, entities to be divested continue to be maintained to including the two main Scottish banks, are on a high standard, and indeed a trustee will be relatively moderate salaries, working hard and not appointed to ensure that that is the case, and that, in getting any bonus or getting very little bonus at all. any case, I believe, would be in the best interests of There are two very distinct communities here; there Processed: 12-03-2010 18:54:09 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG7

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13 January 2010 Lord Myners and Mr Robin Haynes are the very high-paid people in investment banking Select Committee, it is an issue which really has not and there are the people doing an honest day’s work gone away. Do you think that you and the for an honest day’s remuneration constituting 99% Government have done enough to get your message probably of the people working for those two banks. across that, given the large sections of public money that have gone into it, the bonus culture is no longer Q757 David Mundell: So, to be clear, your view is acceptable as a form of remuneration? that the Royal Bank of Scotland, in particular, is Lord Myners: Well, I do not think that we, as able to operate a sustainable, profitable investment Government, can ourselves set new standards and banking division without requiring to pay what approaches for remuneration in any economic might be perceived to be market rates or bonuses in sector. What we have done is draw attention to the relation to those activities? eVect, we believe, that the compensation culture has Lord Myners: No. I think what I would say, Mr had on risk in banking. It is undoubtedly the ‘winner Mundell, is that, if we limit this to the Royal Bank takes all’ culture of some remuneration structures in because these two banks are very diVerent in their investment banking which contributed to the taking business strategy and business model, the Royal on of excessive risks which ultimately exposed the Bank of Scotland’s Global Market and Banking institution, but we have made it very clear that we Division is a very profitable source of activity at the expect the FSA to take remuneration into moment. It is operating in a sector of the industry consideration in evaluating a bank’s required which is producing very good returns on capital and, capital, and indeed we are seeking powers in the to achieve that, they need to be able to ensure that Financial Services Bill to put a statutory obligation they can recruit, retain and motivate the people they on the FSA in that respect, and we have also of require. Mr Hester, in his evidence yesterday to the course introduced a banker’s bonus tax on the Treasury Select Committee, said that this was his employer company which is designed to bear down, most pressing concern at the moment, to ensure that but this is a global phenomenon. I think we are going the bank was adequately staVed. I do not know if it is to see in the United States this week and next that in the interests of the banks or the taxpayer for those major banks are paying very high bonuses and, if we banks to not have the necessary skills to manage want the Royal Bank of Scotland to play in a global their business and manage their risks responsibly. world, which undoubtedly it has the resources to do, it has to equip itself appropriately to do that. Q758 David Mundell: So that means, eVectively, having to pay the going rates for the job? Q762 Pete Wishart: With the management put in Lord Myners: Well, I think that, if you buy a Scottish place and given that far too much of the activity of Premier Division football team— the banks in the past ten or 20 years was the bonuses and the risk-taking, are you confident that we are Q759 David Mundell: I think you would be very moving towards a new system of remuneration unwise to do that! where the banks can feel that they can be competitive Lord Myners: —but you decide that you are going to without going down this road of the excessive select with the resources that are only available to a bonuses? I am quite interested in your comments bottom of the Scottish League Division, then your there about the worldwide nature of all of these sorts Scottish Premier team is likely to end up playing in of things because what the banks are saying is that, the lower division. You have to ensure that the bank in order to be competitive internationally, they need is adequately staVed. There is a market and, from my to have this bonus structure in place, but, if all the own perspective, the levels of payment in those other markets are doing the same type of thing and markets are extraordinary, but the Royal Bank of largely the excessive bonuses are being shunned, Scotland cannot redefine the world alone. there will not be that competition, so how do we move from the bonus culture to a sustainable form Q760 David Mundell: Mr Hester has previously said of remuneration? that political meddling was damaging the bank. Do Lord Myners: That is a huge question, but, Mr you think that is a fair statement? Wishart, the word “international” featured in your Lord Myners: I think he referred to politicisation of question and your earlier question, I believe, and I the bank, and I am not entirely sure what he meant think you are right to do that because we cannot by that, although I noticed in what, I thought, was a define the rules in the United Kingdom alone, which rather good evidence session yesterday to the is why it is absolutely right that Gordon Brown and Treasury Select Committee that he did not develop Alistair Darling have been using their influence in that theme, but I think that, if your bank is 84% the G20 and in other fora to push the world banking owned by the taxpayer, you are in a world of politics system towards a new approach to compensation and you are accountable and that is the price that the which puts much emphasis on incentive Royal Bank of Scotland and Lloyds Bank have had compensation being provided in shares, requiring to pay for being rescued by the taxpayer. those shares to be held for a long time, deferring the receipt of the benefit and including a clawback Q761 Pete Wishart: I think there is an expectation requirement in circumstances in which the amongst the public that the whole excessive bonus performance of an individual or a team is culture was a thing of the past, but in the course of subsequently regarded to have been less good than the past few weeks and months, and again yesterday was believed to have been the case when the bonus when Stephen Hester was in front of the Treasury was originally granted. I have spent many years of Processed: 12-03-2010 18:54:09 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG7

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13 January 2010 Lord Myners and Mr Robin Haynes my life working in the banking industry and it is only Q766 Mr Davidson: Moving on, we have had in the last ten or 15 years that these extraordinarily meetings with the Scottish Federation of Small high bonuses have become part of the culture of Businesses and the Law Society of Scotland, and I banking. They really were not the case until the mid- am presuming that you and your staV have seen their 1980s, possibly with the introduction of Big Bang evidence. which opened up the City to a much more Lord Myners: Yes. international perspective than had previously been the case. Q767 Mr Davidson: Both of them were essentially saying that they feel that their memberships are being gouged by banks charging excessive amounts, Q763 Mr Davidson: Can I just be clear then that making loans much more diYcult to achieve, putting some of these banks are going to be paid, what many them on to higher rates and generally being in my constituency will see as, obscenely large sums unhelpful. Now, is that your experience? of money, and you are telling us, eVectively, that Lord Myners: Well, I engage very frequently with the there is nothing that we can do about that and that, senior management of our banks and this is an issue eVectively, the Government’s position is to socialise which I raise with them. Six months ago, the issue the losses and privatise the gains? was availability of credit and it is quite clear from the Lord Myners: No, I am not saying that at all. I think data and from reports from organisations, such as there was a non sequitur there. What I am saying is the Bank of England, that credit availability has that I personally find this wide disparity of earnings significantly improved. Now, the focus is on terms, unpalatable and I think they actually in themselves both cost and other requirements in terms of contribute to risk. A society which is carrying very guarantees, et cetera, and that is one of the reasons, large inequalities of wealth is possibly a riskier Mr Davidson, why we have required the Royal Bank society, but I am saying that, if we said to the Royal of Scotland and Lloyds Banking Group to issue Bank of Scotland, “You can only pay your key customer charters in which they have set out their employees up to the national average earnings” or approach to pricing for risk and determination of twice the national average earnings or some other lending terms, and, as I said, we regularly meet with arbitrary figure, the eVect would be a significant the banks to discuss these issues. erosion in the competitiveness of that bank, a loss of ability to revive credit, a loss of employment, Q768 Mr Davidson: Is it your view, therefore, that, if particularly in Scotland, and a decline in the stature we were asking these organisations now, they would of the bank. give us a more favourable reply, that things have, therefore, improved? Lord Myners: I believe that over the last 12 months Q764 Mr Davidson: What jobs would go in the availability of credit to creditworthy borrowers Scotland? How many people in Scotland are has improved as banks have regained confidence to employed in the Investment Banking Division of the lend. A particular consequence of low interest rates Royal Bank of Scotland? is that normally banks seek to make profits both Lord Myners: I am saying that the impact across the from the deposit side of the balance sheet and the border of the State beginning to limit remuneration asset side, and I will not go into too much detail here, for an international bank would render that bank but, because of very low interest rates, the less competitive. While the Royal Bank of Scotland opportunity for deposit-side profitability or liability continues to be run from Gogarburn with a very profit is a lot lower and, therefore, they are tending substantial number of employees in Scotland at the to increase their margins on their loans. I believe again that Mr Hester confirmed that in his evidence heart of running the bank in areas such as HR, law, to the Treasury Select Committee yesterday. communications and regulation, I think very However, we are seeing more competition, we are substantial numbers of employees in Scotland are seeing foreign banks active again in the UK market directly or indirectly involved in the Investment and of course we have seen a lot of activity in the Banking Division. capital markets which has been good for business borrowers. Mr Haynes: If I can perhaps come in from the Q765 Mr Davidson: You started your answer there Scotland OYce perspective on that, we are aware of by saying that you find the high salaries unpalatable very similar anecdotal evidence of small firms and the rest of your answer was telling us, if I can be finding diYculty in gaining credit, but the words of ungrammatical, that you ‘palate’ it, did you not, Owen Kelly, who is Chief Executive of Scottish really? You find it unacceptable, but you are Financial Enterprise, last month, I think, are quite accepting it because you are saying that nothing can informative when he noted that, “We must also be done. acknowledge that the situation of many borrowers Lord Myners: I am saying that I believe it would be has changed. Collateral, such as property, has in even more unpalatable for Government to seek to most cases declined in value, sales projections may force on the Royal Bank of Scotland or an industry be down and growth expectations may well have or a sub-sector employment practices which severely been cut, so the level of risk attached to lending to disadvantaged British employers operating in a them has increased, leading to an increase in costs. If global market. banks did not recognise these changing risk profiles, Processed: 12-03-2010 18:54:09 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG7

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13 January 2010 Lord Myners and Mr Robin Haynes they would be lending at risk and perhaps storing up whole range of activities that they regarded as a bit problems for the future, so, to avoid a recurrence of over the top. What are you and the regulatory the crisis”, says Owen Kelly, “banks must ensure authorities doing to curb those actions by the banks? tighter scrutiny of borrowing propositions, and this Lord Myners: Well, the FSA has a broad principle of means pricing credit more accurately and that, in treating customers fairly and then it narrates those turn, suggests that that has been underpriced in the principles in terms of what it understands that to be. past”. Now, in the Scotland OYce we would not The FSA for many years operated on the basis that necessarily be defenders of Owen Kelly because, as I customers were capable of looking after their own said, we do receive quite a lot of anecdotal evidence aVairs as long as they received adequate of diYculty in obtaining credit, but it is clear that information, and I think we are now beginning to there are two sides to this particular coin. recognise, the FSA and the OFT, that we need to go further in terms of protecting customers of financial Q769 Pete Wishart: Regardless of all that, I, as a institutions and we are requiring banking constituency Member of Parliament, still have a institutions to make a number of changes in their number of people from my business community who practices. I have seen evidence myself, and indeed I are very concerned about the whole environment have met with MPs and their constituents who have that we are currently operating in and they are received quite dreadful treatment at the hands of having diYculty in securing the necessary finance in some banks and I have found it very painful to listen order not just to grow the company,but to keep them to one particular case that was brought to me of a in business. Do you feel, Lord Myners, that the customer of HBOS, and I have taken that up at the Government is doing enough to support particularly highest level with the banks. I think the banks are small and medium businesses through this recession? realising that they need to treat their customers in a Lord Myners: Well, we have introduced a number of very responsible way. schemes, such as the Enterprise Finance Guarantee, to encourage the provision of finance to small Q772 Mr Davidson: So these practices should be businesses, co-financing with the EIB, we have stopping then? Obviously, I appreciate that many of deferred the proposed increase in the small the customers of banks are not necessarily lily white companies’ corporation tax rate and we have oVered in these matters and, as Mr Haynes said earlier on, the opportunity to defer payment of VAT and other I recognise that there are two sides to the story, but taxes and business rate increases when they have nonetheless, there are some practices here which taken place, so there has been a wide range of actions should be minimised. taken by Government to support smaller businesses. Lord Myners: Well, I think harassment of customers, We have a Small Business Forum, which I attend which was the particular case that was brought to my along with Lord Mandelson and Lord Davies of attention by Mr Paul Goggins, is wholly Abersoch, in which we meet with representatives of unacceptable and HBOS has changed its practices in both the lending community and the borrowing respect of a computer system which generated phone community, including, as Mr Davidson said, the calls. I think it was called ‘Triad’ which in itself, I Federation of Small Businesses, so we are actively think, was rather a message as to what it was doing, dialoguing with these people all the time. I would say but I think the OFT and the FSA are moving to to you that I have no doubt that the situation is require very fundamental changes in the way in considerably better than it was 12 months ago. which banks treat their customers. The Financial Services Bill includes restrictions on sending Q770 Pete Wishart: Also, you have probably seen unsolicited credit card cheques and of course we the remarks from Adam Posen who said that continue, because you mentioned the Citizens throughout the recession what this demonstrated Advice Bureau, Mr Davidson, to give additional was that there was not a “spare tyre” if something funding to the Citizens Advice Bureau to support the went wrong in terms of the general banking system, very, very important work they are doing to help that there was not a lifebelt there for the small people cope with this recession. businesses to rely on. Do you feel that those are competent remarks and do you feel that something Q773 Lindsay Roy: I think that the additional like a spare tyre would be necessary in the future if support has been very warmly welcomed, but we still we were to experience any of these sorts of hear in our constituencies of the huge pressures. Are diYculties again? you saying categorically that there will be further Lord Myners: Well, I think that there are some big funding after March to support them in this key task questions that need to be answered about the on behalf of constituents? capitalisation of banks, their required liquidity and Lord Myners: I know that the Chancellor of the the operation of the regulatory system both Exchequer is very aware of the very good work that nationally and globally, and on all those fronts very is being done by the Citizens Advice Bureau, but it serious progress is being made. is above my pay level to make commitments which go beyond those which have already been made. Q771 Mr Davidson: We had evidence from Citizens Advice, I do not know if you have seen that, but Q774 Lindsay Roy: But will you draw this matter to there is a litany of stories of grief about banks’ his attention? behaviour being much tougher on customers, Lord Myners: He is already aware of this matter, Mr pursuing debt more rigorously, silent phone calls, a Roy, but I will do so again. Processed: 12-03-2010 18:54:09 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG7

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13 January 2010 Lord Myners and Mr Robin Haynes

Q775 Lindsay Roy: We have also heard from the Lord Myners: Well, I think that the steps which have unions that front-line staV are still required to sell the been taken to recapitalise and put new leadership same products to the same levels. In other words, into these two banks will see them in due course they still have a very target-dominated culture in regaining their standing as much-admired, spite of the fact that we are in recession. Do you feel successful organisations which will have beneficial there needs to be a change in culture in some of the consequences for their customers and for those who banks in the way in which they ask their employees work with them and supply them with services, but to take on these very substantial targets and of I do want to reiterate that on my regular visits to course, because they often cannot meet the targets, Scotland, and I am in Edinburgh on Friday seeing they are not eligible for bonuses? investors, there are real pockets of excellence in Lord Myners: Well, I was a businessperson; I was the Scotland. There are only £600 billion of assets under director of a bank and I was Chairman of Marks & management in Aberdeen, Edinburgh and Glasgow, Spencer before I came into this career. To set targets and this is global leadership, there is more than that which people know they cannot achieve is not in assets under servicing, custody and actually to achieve any sensible outcome at all administration, there are excellent legal firms based because it is not having an incentive eVect, and in Edinburgh and Glasgow, and of course we have people know whether they are likely to be able to these very substantial insurance companies. I would achieve the target, so that would sound to me to be like to make one other point because we have talked commercial folly to adopt that approach. I think the about Government and UKFI as a shareholder, but banks need to be constantly mindful of the fact that there is also a role here for institutional shareholders their business will prosper best if they provide a good and it is very interesting to notice that Scottish service of good-value products to their customers institutions are particularly to the fore in exhibiting and, to do that, they must know their customers and real awareness of, and commitment to, good they must only sell to their customers products governance and stewardship, and I think here of Mr which are appropriate to that customer’s Skeoch and Mr Jubb at Standard Life and I think of requirements. I would hope that the new Insight Investments who really have put some of management of both the Lloyds Banking Group and their London-based competitors in the shadows in the Royal Bank of Scotland would recognise that in terms of their commitment to good investment the directions they are giving there. leadership, so I think there is much that is still very strong in financial services in Scotland, and I hope Q776 Lindsay Roy: The plea from some of my that that will continue to be the case and that constituency working banks is that the targets are set banking will rejoin those other strong players in the with them and not for them, in other words, things broader financial market. are done with them and not to them. Lord Myners: Well, I would absolutely support that. Q778 Chairman: Can I thank the witnesses for their I think that is the most eVective way of getting attendance this afternoon. Before I declare the people motivated to produce their best. However, meeting closed, would you like to say anything in Mr Davidson was saying that I am saying something conclusion, perhaps on issues which we have not is unpalatable, but I am ‘palating’ it, but we do not covered during our questions? commercially direct these institutions and I do not Lord Myners: I think I would like to repeat, firstly, think it would be appropriate for Government or that this has been a global problem and it has not ministers to begin to be involved in issues around been a Scottish problem alone, secondly, to say of individual performance-targeting. What UKFI does course that the support which has been provided to is to focus on the quality of the management and the the Royal Bank of Scotland and HBOS has come people who are making these sorts of decisions. from the resources of the full UK economy and not just from the Scottish economy and, thirdly, to Q777 Chairman: Lord Myners, would you think that emphasise that there are many areas of financial the failures of HBOS, the Royal Bank of Scotland services in which Scotland continues to be an and the Dunfermline Building Society have outright global winner, and we would like to see that damaged the reputation of Edinburgh and Scotland, continue to be the case. Finally, I would thank you and what is the Government doing to enhance and very much for your courtesy. improve that reputation? Chairman: Thank you for your attendance. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [SE] PPSysB Job: 439642 Unit: PAG8

Ev 120 Scottish Affairs Committee: Evidence Written evidence

Letter from Gordon Pell, Deputy Group Chief Executive, Royal Bank of Scotland Thank you for your letter of 23 March asking for clarity on our plans for jobs in the UK and Scotland. We have been very honest about the reality that we are under significant pressure to cut costs across our business as are all banks and most of our customers as we face into the worst of the recession. This is a very regrettable but unavoidable reality. We have not set out any overall target for job reductions globally, in the UK or in Scotland. We have an overall target for cost reduction over the next three years of £2.5 billion. This will be worked through by all of our businesses around the world and the implications for our people will be communicated directly to them and their representatives as we know it. We will announce this in an orderly and appropriate way and have and will continue to fully meet our consultation obligations throughout. Turning to specific comments I made on 19 March 2009. I was referring to the announcements we have made about UK jobs since the start of the year. We do not yet know the exact impact on Scotland as we have not yet completed the process. It was unfortunate that the confusion arose in the Committee as I was trying to provide a best estimate that job losses may be in the hundreds but I could not be specific because this number will be subject to change as the process continues. For example, we do not know what the take up of voluntary redundancy programmes will be and where the staV that opt for voluntary redundancy are based. In addition, employees will also be seeking redeployment opportunities. It is only when the approaches to mitigating against compulsory redundancies are completed eg voluntary redundancy and redeployment that the numbers who leave the organisation as a result of compulsory redundancy will be known including the number for Scotland. We are trying our best to handle a diYcult situation with sensitivity to our people and we have sought to avoid putting numbers out that are not accurate. In response to Committee questioning for a precise Scottish number on the announcements to date, until the process is completed we will not be in a position to give a definitive number for Scotland. We would appeal to the Committee and its Members to recognise that we are fully aware of our responsibilities on all fronts. We know that we are in a privileged position being able to restructure the company with the support of the taxpayer behind us. We know that we are only in this position because of our central role in society and that with that role come responsibilities we mean to fulfil. Our mission is to restore the company to standalone strength so that we can repay the support of the taxpayer. This imperative will mean a number of diYcult decisions have to be taken in particular as they aVect jobs. I tried my best to be as open and as honest with the Committee as I could be and to give straight questions as straight an answer as I could. I regret that this has caused confusion and I hope that this letter sets the record straight. 23 March 2009

Further letter from Gordon Pell, Deputy Group Chief Executive, Royal Bank of Scotland Thank you for your letter of 26 March the contents of which I note very closely and try again to answer in full below. I hope you will convey to the Committee how seriously I took the evidence session. The amount of time that went into my preparation was very substantial indeed and I am very aware of the importance of the Committee and an evidence session of this nature. As I mentioned to the Committee and in my letter of 23 March we have committed to a significant cost savings programme to cut £2.5 billion from our operating expenses over three years. We have not made an estimate of the global jobs impact of this as we cannot predict with any accuracy what they will be either in total or by geography. This will be worked through by all our businesses around the world. What I referred to in my oral evidence was an estimate of the potential impact in Scotland of the 2,700 job losses in the UK that we have already announced this year. I made clear in the evidence that because of the due process we are working through we are not yet in a position to say what the exact number for Scotland is. As I said: There are a number of options available so I cannot specify on exactly which site that would be. The rough feel at the moment will be for Scotland several hundred. I was then put under very understandable pressure to be more precise by members of the Committee. I then put a more specific number on as an estimate having been asked to do so. During the Committee you will be aware that the media were already misreporting that the 2,700 number I referred to was a new announcement. This misconception was something we were keen to correct with the media following the Committee meeting. In addition we sought to ensure that the media were aware of the fact that the specific numbers I mentioned to the Committee were estimates. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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In all of this as I said in my previous letter, I have sought to give honest answers to straight questions. I hope the Committee will understand that we can only report what we know, when we know it. We have been very clear that job losses are inevitable and that there will be more announcements to follow those that have already been made. Many of these will have implications for our staV in Scotland. All our businesses all across the Group’s staV population of nearly 180,000 around the world will be aVected. We are trying to manage this diYcult process in the best possible way and to be as sensitive to our people as we possibly can. We have agreed with the Unite Union in the UK that we will do all we can to keep compulsory redundancies to an absolute minimum. As a result of this we cannot predict what the number of compulsory redundancies will be until the end of the process. This makes it impossible for me to answer your second question. Again I repeat that I regret the confusion the Committee feel has been caused and I hope this letter helps set the record straight. 31 March 2009

Letter from Archie Kane, Group Executive Director, Lloyds Banking Group I wanted to write a short note to you following my appearance before the Scottish AVairs Select Committee on Thursday 19 March. Various members of the Committee asked for some information on our account fees and on our bonus policy—I have enclosed this information. I found the session particularly useful as an indicator of the priorities and concerns of you and your colleagues. I trust that this was reciprocated, and that I was able to oVer you the information you were looking for. My colleagues in Scotland and I have an ongoing programme of contact with MPs and MSPs, which we will be continuing throughout the year and beyond. This is a key period for our company, and for the sector as a whole. Archie G. Kane, Group Executive Director 6 April 2009

Annex Account Overdraft Fees The fees noted below are charged by the Lloyds TSB and Bank of Scotland brands to a customer who executes a transaction which results in or would result in an unarranged overdraft or would further increase an unarranged overdraft. The monthly fee relates to any billing month during which a customer uses an unarranged overdraft; the daily fee relates to transactions on a particular day. All the information in this note is publicly available.

Lloyds TSB Monthly fee £15 and Daily fee £6 if overdrawn balance is less than £25; £15 if overdrawn balance is between £25 and £100; £20 if overdrawn balance is more than £100;

Notes: 1. These fees apply only to unarranged overdrafts—arranged overdrafts carry no fee. 2. Lloyds TSB has introduced a number of tools to help customers manage their money and avoid charges altogether, such as: text message alerts when their balance is nearing, and has gone over, their limit, at a price of £2.50 per month; and a grace period until 3.30pm on any day a customer goes over limit, so that they can replenish their account and avoid a fee.

Bank of Scotland—Reward Current Account Monthly reward £5 reward per month when customers pay in £1,000 or more and Daily fee £5 (the fee for using an arranged overdraft starts at only £1)

Bank of Scotland—Other Current Accounts Monthly fee £28 and Daily fee £35 Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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Notes: 1. These fees apply only to unarranged overdrafts—arranged overdrafts carry no fee. 2. Bank of Scotland and Halifax have a dedicated Money Management Team—a free service which helps customers work out how to repay debt—as well as an interactive budget calculator and 24 hour banking.

Social Banking Accounts Lloyds Banking Group is the Scotland’s largest provider of social banking accounts, with around 650,000 customers (and four million over the UK as a whole). Lloyds TSB, Halifax and Bank of Scotland all provide bank accounts with no fee and no overdraft facility, but with a direct debit facility and a debit card for ATM withdrawals.

Bonus Determinants The following information relates to the bonus structure for branch staV in Lloyds TSB and Bank of Scotland, who are paid an average of around £17,000 a year, and receive an annual bonus of around £1,000. Weightings attached to particular products regularly change to match business need.

Bank of Scotland — All branch staV, with the exception of dedicated sales staV, are rewarded according to the performance of the branch, rather than individually. — The bonus is part based on branch service performance; part on branch sales performance: — all staV in any given branch (with the exception of sales staV) will receive the same percentage bonus. — Dedicated sales staV are rewarded diVerently, with more weighting given to individual performance. The reward is therefore part based on branch sales result, part based on branch service result, and part based on individual sales performance across a range of products sold.

Lloyds TSB — Acceptable risk and customer service are key elements in a bonus reward. Risk and service contribute to a rating of the quality of a sale—if the sales do not meet the acceptable quality, no bonus is given. — Bonuses are only earned after a member of sales staV has achieved 100% of his/her target. — Cashiers and first line sales and service staV are rewarded with a flat fee for each successful referral and for each sale, regardless of the product sold. — Dedicated sales staV (who sell a wider range of products than first line sales staV) receive a total reward based both on the volume of product sold and the type of product sold: — for the volume element, the same reward is paid regardless of the type of product sold, — for the individual product element the reward diVers according to the type of product.

Memorandum from Royal Bank of Scotland Group Royal Bank of Scotland Restructuring Plan and Associated Job Losses Further to your correspondence with Mr Pell, I am writing to update the Committee on the Group’s position and actions taken since the initial evidence session. I would like to assure you and the Committee that I and my colleagues intend to keep you fully informed of significant job announcements, particularly as they relate to Scotland. As you know, on 6 April RBS entered into initial consultations with the trade union Unite, and our staV over a business plan for the Manufacturing Division that regrettably puts up to 4,500 roles at risk in the UK over the next two years. The decision was taken at a meeting of the Group’s Board on 3 April and I am aware my colleagues communicated the restructuring plans at the earliest possible opportunity to you and other interested parties as we want to be open and transparent about such announcements. You will of course want to know where the job losses will be concentrated and who will be aVected. We do not have that level of detail yet and once we have it I will be in touch again with the details. However, I want to explain why the full detail is not known at this point. There are two main reasons: First, it is because we are carrying out the restructuring business by business. With 106,000 staV in the UK alone, based in 2,500 locations, this is a complex task. However, as soon as we have clarity on the likelihood of any job losses in any given location we will begin the process of consulting with our staV representative bodies, informing our staV directly and contacting local elected representatives. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Secondly, it is our intention to mitigate the overall job losses as best we can. This means that we will actively redeploy staV across the Group, ensuring our own people are used to fill vacancies wherever possible. For example, in relation to the Group Manufacturing Division we have already identified 650 redeployment opportunities and will make less use of agency staV. Natural turnover is 10% or circa 2,500 people per annum for this business and we will oVer employees voluntary redundancy which should also help to reduce the overall impact.

We cannot therefore accurately predict at this stage how many people will leave the Group on a compulsory redundancy basis as a result of the restructuring. In our view, it would be irresponsible to speculate about such number as it would create further anxiety among our employees.

We have been up front that a significant reduction in roles was likely because of the problems we have faced and the need to reduce costs that all businesses face in a recession.

Indeed, Stephen Hester, Chief Executive OYce, said on 28 February:

We believe that we, without harming our customer service, can and therefore must cut £2.5 billion out of our cost base. I know that it has a human cost because one of our biggest costs is people. I’m in no way other than regretful about that but we must do it. We are not putting up a job loss number, the first people who hear about job issues will be our staV and they will hear when we’ve made the decision one-by-one, geography after geography and that’s why we’re not doing it. There will be a human cost and we just have to work through that responsibly as we will.

Mr Pell should have been more explicit in re-emphasising this and he regrets he was not. That is not the same, however, as pronouncing detailed numbers by business area and geography. I am sure you will appreciate that we have a duty to follow a process that respects our agreement to consult early and confidentially with Unite and our workers before we make public announcements. For that reason it would be completely inappropriate to make pronouncements on potential job losses.

Furthermore, RBS Chairman Sir Philip Hampton recently addressed the bank’s Annual General Meeting (I attach the speech for your information (not printed)) and highlighted the same reasons why we cannot predict in advance what jobs will be lost, when and where. What we can commit to now is working through our plans across each of our businesses and telling our employees and their representatives as soon as information is available. What we will then do is work very hard to ensure that we keep compulsory redundancies to an absolute minimum.

In terms of the Group Manufacturing jobs announcement, the Board was briefed on the plan on 3 April, Unite was informed on 6 April and we informed staV on 7 April. As you can see therefore, given the timings, it was impossible for Mr Pell to be aware of the detail of what was planned and how it might eventually impact Scotland, and therefore to communicate it to you and the committee. The impact on specific geographies, including Scotland, will become clear as we go through the process I have outlined above.

To complete the picture for you, we have made a number of other job announcements in recent months. In November the Global Banking and Markets part of the Group announced 2,700 losses, and in February RBS UK announced 2,300 losses. In addition we have also made a number of smaller more localised announcements. Stephen Hester was also clear at our Interim Management Statement announcement on Friday 5 May that it is an unfortunate consequence of the actions we must take to get our house in order through a time of global recession that there will be further significant job losses across all of the geographies in which we operate.

Once the consultation process comes to an end and we have the clarity I know you are looking for regarding the net jobs impact in Scotland, I will get in touch again. I very much hope this will be before the Parliamentary Recess in July.

Separately you asked for details on the funding of Sir Fred Goodwin and Gordon Pell’s pension.

Sir Fred’s pension is funded partly through The Royal Bank of Scotland Group Pension Fund (the Group’s main tax-registered pension fund in the UK) and partly through an unregistered (FURBS) scheme. Approximately 97% of the pension is payable from the FURBS with the remainder payable from the Group Pension Fund.

Mr Pell is entitled to a pension (on retirement at age 60) based on his salary over his final year of service and his 39 years of service in banking. Around half of Mr Pell’s pension entitlement is funded through the Group’s main pension scheme, which includes his entitlement from 30 years of service with Lloyds TSB. Mr Pell joined NatWest in 2000. The remaining entitlement will be met directly by the Group. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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I hope that this information is in order and gives the Committee what they require. As always we stand ready to assist the Committee further in its deliberations. We take very seriously our responsibilities to be transparent and accountable to all our communities and their representatives. It is a matter of regret for us that the attempt to be as open and helpful as possible has not enhanced our reputation with the Committee but I hope the Committee will appreciate our intent. 19 May 2009

Memorandum from the Chartered Institute of Housing in Scotland Introduction The Scottish AVairs Committee, in the UK House of Commons is conducting an inquiry into the banking crisis in Scotland. It has asked CIH Scotland to submit written evidence as part of this inquiry. The committee has asked CIH Scotland to focus on:

— the state of the housing market,

— mortgage lending issues, and

— the impacts on social housing developments.

This CIH Scotland submission addresses these issues and also sets out the CIH Scotland 10 point plan to supporting housing through the recession and beyond.

CIH has over 2,500 members in Scotland and more than 22,000 across the UK and worldwide. Members of CIH are individuals working in the housing, support services or communities field for organisations including local authorities, housing associations, academic institutions, the Scottish Government and Government agencies, and the private sector. CIH also oVers membership to tenants. Because of the breadth of its membership, CIH can provide an impartial view on housing policy and practice, with the interests of communities and developing good quality housing and associated services to communities at its heart. CIH is active in promoting professionalism in housing and provides or supports a wide range of education and careers services, training and continuing professional development (CPD) services.

The State of the Housing Market in Scotland Scotland has been building between 20,657 and 26,467 (see Table 1) new homes per year between 1996–97 and 2007–08. These are both private sector house building and aVordable house building by local authorities and housing associations. As the impact of the credit crunch and the onset of the recession have begun to bite, there has been a significant fall away in new house building starts in both the private sector and the aVordable housing sector. Table 2 illustrates the rapid decline in new starts in quarter 3 and 4 of 2008 compared to the third quarter in previous years. Scottish Government figures for Quarter 1 2009 are not yet available. However, statistics from NHBC showed an 88% decrease in the number of new homes being started in Scotland compared with the same period in 2008. What is more concerning is that the Scottish Government has brought funding forward from 2010–11 in a bid to accelerate new aVordable housing, yet new starts have continued to decline. This is a concern as housing associations are responsible for nearly all aVordable house building (although new funding for local authorities will change this to some extent in the future). Some of the possible reasons for this are looked at below (see: Impacts on the Social Housing Sector).

Table 1 HOUSE BUILDING COMPLETIONS 1996–97 to 2007–08

Year Completions Year Completions 1996–97 20,695 2002–03 22,747 1997–98 22,586 2003–04 23,819 1998–99 20,657 2004–05 26,467 1999–2000 23,121 2005–06 24,927 2000–01 22,111 2006–07 24,219 2001–02 22,577 2007–08 25,774 (Source: Housing Statistics for Scotland, Scottish Government). Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Table 2 NEW HOUSE BUILDING STARTS

2004 2005 2006 2007 2008 Q3 6,464 5,492 5,640 5,586 3,173 Q4 5,537 5,925 5,597 6,708 3,166 (Source: Housing Statistics for Scotland, Scottish Government). The Scottish Government, in its October 2007 discussion document, Firm Foundations: The Future of Housing in Scotland1 sets out a target to increase the rate of new supply to at least 35,000 new homes per year by the middle of the next decade. The Government believed that this was necessary to meet Scotland’s housing needs. It is a target that received wide support in Scotland. However, the significant decline in house building in 2008 makes this target increasingly diYcult to achieve. The decline has been seen in both the private housing sector and the aVordable housing sector. The impacts in the private housing sector can be largely attributed to the credit crunch, leading to a major slow down of the private housing market. Mortgages have become increasingly diYcult for people to access and therefore house sales have fallen sharply,leading to builders being unable to sell proprieties or aVord to build new ones. Data from the Council of Mortgage Lenders shows Scottish house purchase lending declined 40% in 2008.2 In the fourth quarter of 2008, house purchase loans were down 23% from the previous quarter3. This is larger than the UK wide 14%. In the aVordable housing sector, the challenge in accessing private finance, as a result of the credit crunch, has impacted on housing associations’ ability to build new homes. This has been compounded to some extent by Scottish Government policy on the levels of subsidy its prepared to give to support new aVordable house building. The 2008 CIH publication, The Credit Crunch and the Scottish Housing System4 provides a good background to the credit crunch and how it has impacted on housing. The slowdown in new housing supply is not an indication of falling housing demand or need. Increasing repossession rates and limits to private finance has meant that there is increased pressure on social housing providers, with more households looking toward the aVordable housing option oVered by local authorities and housing associations to meet their housing need. With mortgages having become more diYcult to obtain, households who may have opted for homeownership are also looking to the aVordable housing sector as a way to meet their housing demand. Demand for homeownership still exists but the ability of people to access it had been severely curtailed. A decreasing provision of new housing makes it more diYcult to meet current and future housing needs.

Access to Lending As noted above, mortgage lending in Scotland had been falling in 2008. The latest figures show this continuing into 2009, with data from the Council of Mortgage Lenders showing that house purchase lending in Scotland continued to fall in the first quarter of 2009. This is down 34% from 11,600 in the previous quarter and 52% from the same quarter a year earlier.5 By the first quarter of 2009, first-time buyers in Scotland typically needed a deposit of 25%, up from 12% previously.6 This is making it more challenging for people seeking to access home ownership. Access to mortgages appears to be falling despite the announcement by RBS, on 11 March 2009, that it was injecting £1.7 billion into mortgages. CIH has questioned whether this is the right approach and whether we should still be striving to promote homeownership as the dominant tenure of choice. It suggested that some of this money should be diverted to housing organisations for more aVordable rented homes. CIH Scotland has commissioned a piece of work looking at the future of homeownership. It stems from a concern that successive Government policies, in eVect promoting only homeownership, have raised fundamental questions around the appropriateness of the continuation of this policy. This timely piece of work will be completed by October 2009. CIH is also suggesting that the diVerences between home ownership and renting should become more blurred over time. To do this CIH is advocating a refocusing of national housing policy on flexible tenure options. The concept of “flexible tenure” has never been well defined, in essence it means the ability for one occupier to move between tenure types (social, intermediate and market rent, shared ownership and full ownership) within the same property over time. Such a policy will move away from pushing people toward full home ownership and instead oVer a policy framework that is more responsive to peoples’ circumstances and needs and any changes in their circumstances. CIH believes that flexible tenure will also do much to help break the cycle of steeply rising prices followed by market crashes in housing.

1 Available at http://www.scotland.gov.uk/Publications/2007/10/30153156/0 2 See http://www.cml.org.uk/cml/media/press/2161 3 See http://www.cml.org.uk/cml/media/press/2161 4 Available at http://www.cih.org/scotland/policy/CreditCrunch ScottishHousing-Oct08.pdf 5 See CML http://www.cml.org.uk/cml/media/press/2288 6 See CML http://www.cml.org.uk/cml/media/press/2288 Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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Impacts on the Social Housing Sector CIH Scotland undertook some research to determine if, in the aVordable housing sector, housing associations were finding it more diYcult to build new homes. This looked at Scottish Government policy changes on the level of subsidy paid to support new building through the Housing Association Grant (HAG), paid from the aVordable housing budget. It also looked to see if the credit crunch was having an impact.

The results of the CIH Scotland research were published in Arrested Development: The challenges facing RSLs in building aVordable housing.7 This found that:

— Over 35% of RSLs may not be able to build new houses as a result of the changed financial climate.

— Of the RSLs that indicated that they could still build, nearly 50% said they had revised their new build targets downwards, with nearly 30% of these reducing programmes by 40–60%.

— Nearly 60% of RSLs said they were finding it more diYcult to access private finance for new housing developments.

— More than a quarter of RSLs have had to raise over 25% additional private finance in order to fund new developments.

The reasons identified for this predicament were:

— The Scottish Government’s decision to reduce the amount of HAG subsidy per house available from June 2008. On average this has meant a reduction in subsidy of £10,000 per house. In February 2009, the Scottish Government announced that it was making a further revision to the subsidy to make it more generous. This has raised the subsidy by on average 6%, resulting in about £4,000–£5,000 additional subsidy per house. This is still £5,000–£6,000 below the pre-June 2008 subsidy. However, in May it reduced it again by £1,000.

— The reductions in subsidy have taken place at a time when private finance has became both more diYcult and more expensive to obtain. With housing associations receiving less subsidy per house from the Scottish Government, many have had to seek to raise the additional funding required, to bridge the gap, from banks and building societies. Many have found this increasingly diYcult or have been oVered much higher interest rates than previously and with more restrictive covenants.

There are over 200,000 people on housing lists for aVordable rented housing in Scotland. In the region of 40,000 households are accepted as homeless each year. As noted above, demand for aVordable housing solutions is likely to increase as a result of the recession.

There is a target to ensure that all unintentionally homeless households are oVered housing by 2012.8 Concerns over the ability to meet the 2012 commitment have been expressed by a number of local authorities, and these concerns pre-date the impact that the recession will have on demand for aVordable housing. A key report prepared for the Scottish Government Toward 2012: Homelessness Support Project9 found that there was a commitment to achieve the 2012 target. Activity was taking place to meet the target even where concerns existed that it may not be met within the timescale. The report highlighted that the single biggest barrier to overcome was the shortage of aVordable housing for rent. CIH Scotland, along with many others in the sector think that now is an ideal time for the Scottish Government to provide increased support for building more aVordable housing.

CIH Scotland, along with Shelter, the Scottish Federation of Housing Associations, COSLA, the Scottish Council for Single Homeless and Scottish Churches Housing Action have estimated a build programme of 10,000 aVordable rented homes each year for the next three years is required to meet current and future housing need.10 Build rates over the last few years are set out in Table 3 and show that the current building rates fall well below that estimate.

7 Available at http://www.cih.org/scotland/policy/ArrestedDevelopment-mar09.pdf 8 This is contained in the Homelessness etc (Scotland) Act 2003 passed by the Scottish Parliament. 9 Available at http://openscotland.gov.uk/Publications/2008/03/27152416/0 10 This is based on an assessment of housing needs research for the Scottish Government. See joint organisations’ CSR submission http://www.cih.org/scotland/policy/CSR2007.pdf Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Table 3 AFFORDABLE HOUSING COMPLETIONS

Year Number of aVordable Year Number of aVordable homes built homes built 2002 4,030 2006 3,947 2003 3,527 2007 4,062 2004 3,097 2008 4,304 2005 4,649 (Source: Housing Statistics for Scotland, Scottish Government). With the house building industry feeling the squeeze and with unmet aVordable housing need, Scottish Government support through the Scottish Budget can help to sustain the building industry, along with the wider Scottish economy. This will help to ensure that the building industry retains its capacity now, via its workforce, and has the potential to gear up to meet future private housing needs once the economic recovery sets in and help Scotland move toward the 35,000 homes target. It also has the potential to deliver more aVordable housing for the public subsidy level, as construction costs may be lower with builders keen to take on contracts.

Wider Issues The contraction in the private house building market has wider economic and policy implications. Homes for Scotland (the voice of the house building industry) estimates that a total of 100,000 jobs Scotland-wide are now directly at risk and around 26,000 (half of the industry’s directly employed workforce) have already been lost as a result of the decline in house building activity.This clearly illustrates the link between the house building industry and the success of the Scottish economy, as well as the financial and employment wellbeing of individuals working in the sector. The loss of production capacity and jobs is not only a short-term issue. It is estimated that it will take the home building industry several years to recover and therefore the build levels for new housing will remain lower than needed. This will make it diYcult to hit the Scottish Government 35,000 homes target. A modelling exercise by Homes for Scotland11 suggests that it may take several years for the capacity of the building industry to recover following the end of the recession. CIH Scotland suggests that support for the building industry now is vital to ensure that further housing demand and housing need can be met. There is a strong case that this support should, in the shorter term, be largely directed toward the building of aVordable housing.

Scottish Government and UK Government Actions The Scottish Government has brought forward £120 million from the aVordable housing budget to speed up the supply of aVordable homes. It has also made available £50 million for local authorities to help fund new council house building. Within the aVordable housing budget the Scottish Government has increased funding to support the Open Market Shared Equity scheme, with a budget of £60 million in 2009–10. It has also put in place £35 million of funding to support the Mortgage to Rent Scheme and the new Mortgage to Shared Equity Scheme. The Scottish Government actions mean that over the next 12 months £644 million will be invested in homes for rent or low cost ownership across the country. It says that it will support the approval of at least 6,500 new and improved properties. This means that the budget for aVordable housing in 2010–11 will be no more than £352.1 million, the lowest level of investment for many years. CIH Scotland supports the actions taken to bring funding forward but is concerned about how aVordable housing delivery will be supported in 2010–11. The Scottish Government has recently written to the UK Government seeking £500 million of additional investment to support aVordable housing delivery and CIH Scotland has supported this call. The UK Government’s Budget on 22 April has resulted in £103.7 million coming to the Scottish Government from the Barnett Consequentials over 2009–10 and 2010–11. Of this, it is estimated that £53.8 million is connected to increased investment in the housing programme in England. CIH Scotland, along with Shelter, SFHA and Homes for Scotland has written to John Swinney MSP, Cabinet Secretary for Finance and Sustainable Growth, to urge him to direct the £53.8 million into the aVordable housing budget for Scotland. This is less than the £500 million that has been asked for and without other funding options becoming available, will still mean a lower than planned aVordable housing budget. The budget for 2010–11 would be £405.9 million as opposed to that set out in the Spending Review of 2007 of £472.1 million.

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Other Issues CIH Scotland believes there is a case for reducing VAT to 5% on housing refurbishment. This will help stimulate not only housing associations, private owners and private landlords to undertake some major work to improve Scotland’s housing stock but again may help to provide a stimulus to the Scottish economy and protect or boost jobs in the building trade and related fields. At a time when people are finding it increasingly diYcult to move home, it will provide an incentive to them to undertake repair and improvement work on their home instead. This is one of the suggestions in the CIH Scotland 10 point plan to address some of the impacts of the credit crunch and recession (see Appendix 1). Other actions that would require support from Westminster, as well as the Scottish Government, to work with lenders to encourage them to oVer struggling home owners a shared equity stake in their home rather than taking repossession action. Some struggling home owners, whilst unable to cover the whole mortgage, may still be able to service upwards of 50–60% of it. If the lender takes the remaining percentage of the home as its stake it can help reduce the mortgage burden on the person and reduce unnecessary repossessions. As a household’s circumstances change they may be able to buy back some, or all, of the stake held by the lender. This is an example of flexible tenure in action. Whilst recognised as a potentially unpopular measure, and not one suited for the current economic climate, in the longer term the UK Government should Introduce Capital Gains Tax on house price increases. CIH Scotland believes that this will help act as a brake on potential future runaway house prices by limiting some of the attractiveness for speculation in the housing market.

APPENDIX 1 CIH Scotland 10 Point Plan The CIH 10 point plan developed at the end of 2008 is set out below. — Provide legal aid to homeowner faced with repossession to make use of the to Mortgage Rights (Scotland) Act 2001 (this is being taken forward by the Scottish Government) and strengthen the guidance on the Act 2 to ensure that SheriVs take all the steps at their disposal to support home owners to remain in their own home. — Increase of funding for Mortgage to Rent in Scotland above the £25 million and bring forward shared equity element as soon as possible. (This is now being taken forward by the Scottish Government). — Lenders to be encouraged to oVer struggling home owners a shared equity stake in their homes rather than taking repossession action. — Speed up £100 million investment and target most of it toward new build housing (Scottish Government has now increased this to £120m) and ring fence any additional money received from Westminster as a result of Barnett Consequentials to invest in housing provision. — Revise the Scottish HAG subsidy levels to the pre June 2008 position, until the recession in over. — In the longer term the UK Government should Introduce Capital Gains Tax on house price increases to help act a brake on potential future runaway house prices. — Reduce VAT to 5% on housing refurbishment works. — Work with the private rented sector to help it meet the needs of more people through oVering more stability in tenancies and having in place an eVective landlord/tenant dispute resolution system. — With lower land prices develop a national land banking scheme (possibly through the Scottish Future Trust) to assist local authorities and their partner housing associations in ensuring access to house building land into the future. — Support housing education in schools and colleges and ensure that housing options advice is available to people so that they can make the informed choices on how to meet their housing needs and aspirations.

Memorandum from Royal Bank of Scotland Group Small Business Lending We continue to support small business across Scotland by providing a wide range of financial products including overdrafts, term lending, asset finance and invoice finance. Over the last year we have increased lending to Small and Medium Sized Enterprises (SMEs) in Scotland by close to £100 million. This is within an environment where demand has remained weak. Our customers have been reluctant to commit to significant investment decisions given the current economic uncertainties. In addition, falling values in both Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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residential and commercial property markets has meant that many of our property customers are waiting until they have seen prices stabilise before committing to further investment. Both of these factors have significantly weakened demand for lending.

There has been a broad based slowdown in lending growth across most sectors from the second half of 2008 onwards. This has been most marked in property and construction which reflects underlying weakness in these sectors of the economy. Lending to service related sectors such as business services, hotels, and health and social work has been more robust. Lending to agriculture has been the strongest area of growth reflecting continued demand from our farming customers. In terms of the pattern of our existing lending, we have a diversified lending portfolio which broadly fits with the make up of the wider economy. The one exception is property which accounts for a higher proportion of lending reflecting the strong growth in this market over the last five years and the reliance on debt funding by many investors.

We have expended significant energy to market our “open for business” stance to our customers through advertising campaigns and mailing to both customers and non-customers. A key part of this marketing activity has been the commitment to lend an additional £250 million in Scotland through the Scottish SME Fund which was launched in February 2009. These eVorts have helped us to increase requests for new lending by around 30% since the beginning of the year, albeit they remain significantly below levels seen in 2007 and early 2008. Furthermore, almost 200 Scottish SMEs have benefited from £25 million of Enterprise Finance Guarantee lending from RBS. We are seeing a broad range of firms accessing the scheme which provides additional financial support in diYcult market conditions. You may be interested in the following quote from FSB Scotland in response to these measures which said “At last, it’s good to see money hitting the grassroots businesses where it can make a real diVerence. We would hope that all the high street banks will follow suit in the positive manner that RBS are now projecting”.

Mortgages As a result of the recapitalisation, RBS made a commitment to maintain the availability and active marketing of competitively priced mortgage lending and have devoted £9 billion to mortgage lending across the UK in 2009. I have enclosed a proof of an advert which ran in Scottish newspapers.12

RBS oVers a wide range of mortgages and also support many shared equity schemes that meet our lending criteria and which help first time buyers and key workers. Since the recapitalisation we have launched several market leading rates with a heavy press presence.

Whilst our market share increased in 2008, overall lending levels were inevitably lower than 2007 because demand for mortgages was low, a trend we have seen continue into 2009. Some of the reasons for this include that the forecasts of further house price falls are putting purchasers oV buying and movers oV moving. Also remortgaging has become less attractive because standard variable rates are almost as low as fixed and tracker rates so homeowners don’t see the need to switch.

Our residential gross lending in Scotland has increased marginally as a proportion of our overall residential gross lending. In 2008 we leant £1,655 million in Scotland representing 9% of the total. To the end of April 09 we have lent £403 million, representing 10% of the total. We are doing our bit.

Repossessions We want to do all we can to support our customers through these challenging times. That is why last December RBS pledged not to initiate repossession proceedings for a full six months after a customer first falls into arrears. This is double the amount of time recommended by the Government but we felt it was important to give our customers some breathing space during what is a very worrying time. No other high street lender has pledged to do the same, so far.

We also feel it is very important that customers in this situation are given the opportunity to seek advice from independent money advice organisations before any steps are taken. This pledge will remain in place until at least the end of 2009.

We would encourage our customers to come to us as soon as possible to talk about their financial problems. This is essential so that we can work together to find a solution that is right for them. Our objective is to support the customers to stay in their homes⁄it is not in our interests to repossess unless we absolutely have to and we only do it where all other options have been exhausted.

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In 2008 we repossessed 98 properties in Scotland, with a similar trend continuing in 2009 with 33 repossession up to the end of April. 5 June 2009

Memorandum from Royal Bank of Scotland Group Today,we have published our results for the first half of the year and I thought it was a good time to update you on the progress we are making in these areas.

Lending to Homeowners and Businesses I am pleased to report that we have made new loans totalling £36 billion to UK homeowners and businesses in the first half of the year. In the first half of 2009, our gross mortgage lending in the UK was £7 billion. This is over 10% of the market, well above our historic 6.5% share. Net of repayments, mortgage lending is up by £4 billion and we are on track to grow our net mortgage lending by £9 billion as planned. In the small business market we have achieved gross lending in the first half totalling £17 billion and we continue to do all we can to make business loans available to creditworthy customers at fair and competitive rates. Many businesses are focused on repaying their debt and deleveraging, as is sensible during a recession. Similarly, creditworthy borrowers are often reluctant to take on new debt when their outlooks are uncertain. To illustrate this, total credit applications in the first half were down 22% on the same period of 2008. However, in spite of this, our approval rates remain high with an 85% acceptance rate. On price, as a result of RBS’s price pledge announcement last year, 94% of SME customers who renewed their overdrafts in the second quarter of 2009 did so at the same margin or lower. I can assure you that we are ready, willing and able to increase lending in line with our undertakings if the demand is there. You may have seen the recent advertising campaign we launched to ensure our customers know that we are open for business and supporting our customers. In Scotland, these adverts reiterated our promise to lend an extra £1.7 billion in mortgages this year and our ongoing support for SMEs.

Job Losses As I said in my previous letter to you, it is our intention to mitigate the overall compulsory job losses as best we can through redeployment and by oVering voluntary redundancy. To bring you up to date on the figures, since October, we have announced 16,000 job losses globally across the Group. As previously notified to the Committee, c 10,000 of these are UK based and include announcements made by Group Manufacturing, RBS UK, Global Banking and Markets and a number of smaller more localised announcements. Of the c 7,400 UK job reductions outside investment banking, we have progressed over 3,100 so far. I am pleased to report that less than one quarter of these job reductions have resulted in compulsory redundancy.I hope this provides you with reassurance that we are doing all we can to mitigate job losses wherever possible. 7 August 2009

Memorandum from Clydesdale Bank Background on Clydesdale Bank 1. Strong in its own right, Clydesdale Bank PLC is also part of National Australia Group, one of just a handful of banks in the world to have maintained a top-flight “AA” long-term credit rating. Registered in Scotland, under a single banking license, Clydesdale Bank operates under its Clydesdale and Yorkshire bank brands. 2. Clydesdale Bank provides traditional banking products and services to personal and SME customers. It has 2.7 million customers, of which approximately 200,000 are SMEs. It operates 342 retail branches (152 of which are Clydesdale Bank) along with a national network of over 70 “Financial Solutions Centres” (15 of which are in Scotland) that provide specialist support for its business customers. 3. Clydesdale Bank also has an alliance with the Post OYce, which enables its personal and business customers to withdraw and deposit cash at any Post OYce in the UK. 4. Maintaining a clear, consistent and strategic approach has helped the Bank avoid the problems and excesses of the sector in recent years. Its business model is firmly focused on supporting customers. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Effect of the Banking Crisis on Jobs,Banking Services to the Public and Small Business Lending in Scotland 5. The financial crisis originated in the US sub-prime market but quickly escalated to aVect the financial system worldwide. A low real interest rate environment coupled with a search for yield led some institutions to under-price risk in a range of financial products. 6. This worldwide crisis has aVected all financial centres, including Scotland, with many financial institutions seeking to deleverage and some requiring capital support from central government. Clydesdale Bank has a strong capital position and no Government capital support was required. 7. In Scotland, recent events led to consolidation amongst some banks and building societies, and increased the funding and liquidity costs of all in the sector. As part of the eVort to rebuild core strength, many of these institutions are restructuring their operations. This may have an impact on the number of jobs they support and their focus on serving customers. 8. In the banking sector in general, the reduced availability of capital, heightened liquidity requirements and the increased cost of funds have constrained the ability of some banks to lend. In addition, some overseas institutions and some domestic lenders have withdrawn from the UK market place, further exacerbating problems. 9. Clydesdale Bank has a long and well established record of prudent and conservative credit management in growing its business. The Bank has never oVered 100!% or “self-cert” mortgages, while its average Loan to Value for all mortgages (on an unindexed basis) is 63%. For the Bank’s entire lending book, the ratio of 90 days past due balances (90!DPD) remains low compared to industry peers. (period to 31 March 2009). 10. The Bank’s support of business customers is predominately managed through its UK wide network of “Financial Solutions Centres”. Each is led by a Managing Partner, who is a senior banker with a personal interest and involvement in supporting the local business community.Deposits raised by each centre are then lent locally to support local businesses and the communities in which the Bank operates. Relationship managers are also empowered to make credit decisions, of which around 90% are made locally, because managers have built a deep understanding of local conditions and individual business circumstances. 11. Despite the current diYcult economic climate, Clydesdale Bank remains able to continue its support of customers. In the first nine months of its financial year (to 30 June 2009), the Bank advanced nearly £3 billion of new lending to its business and mortgage customers. The Bank also pledged to make a further £1 billion of new lending available⁄at a time when customers need it most. 12. A key element of the Bank’s business model (and its growth in recent years) has been the comprehensive range of advice and support it is able to provide its customers. Rather than a “one size fits all” approach, the Bank tailors the most appropriate funding for its customers. For some this may be a simple debt facility. For many others, it will be a more sophisticated mix of invoice and asset financing, hedging and currency loans for importers and exporters. 13. Clydesdale Bank’s devolved business model was created to ensure that its experienced bankers can act as a trusted local community partner for customers, in times good and bad. Each of the Bank’s Financial Solutions Centres has a regular programme of seminars and events that cover a variety of topics, such as budget briefings and regional development discussions. In the last year many of these seminars have focussed on how customers can protect and develop their business in the current climate. 14. This has been further enhanced by the Bank’s central support unit, which provides specialist advice and support for companies encountering diYculties. The Bank has a strong track record in returning these businesses back to health. 15. Clydesdale Bank’s strategy remains unchanged. While the Bank cannot control the external environment it has eVectively managed its response to it with strong and disciplined cost control and a very conservative liquidity and capital position. Over the last three years, its headcount has remained broadly stable. The bank’s increased back oYce eYciency has enabled it to increase customer facing roles. 16. Scotland continues to be an attractive and important location for Clydesdale Bank. The Bank employs nearly 4,000 full time equivalent employees (FTEs) in Scotland—of which some 2,600 are in the greater Glasgow region. 17. While many of these roles serve local customers, Scotland continues to host a number of functions that support the rest of Clydesdale Bank’s UK operations. This includes the Bank’s Legal, Risk, Finance, Technology, and Customer Contact Centres. 18. The skills requirements of the business are therefore diverse and benefits from the large pool of financial services talent that is available in Scotland. The Bank has a strong commitment to developing the banking skills and qualifications of its workforce. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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The Effect of the Failure of Scottish Banks and Building Societies on the International Reputation of Scotland’s Banking Sector 19. The recent financial crisis has been a global phenomenon and has aVected all countries to some extent. 20. In Scotland, there are very many employers of all sizes across the financial services sector as a whole. Within this diverse industry, there have been a limited number of institutions that have experienced very significant diYculties, albeit they are large employers. It is impossible to say with any certainty what impact the recent diYculties have had on Scotland’s overall reputation as a financial centre. 21. Scotland has been successful in attracting investment in its financial services industry in part because of the reputation that it has for the quality of life that it oVers and the availability of a well-educated, skilled and committed workforce. To continue to be successful in the future, Scotland must maintain a diverse, skilled and motivated workforce, and provide an eYcient, eVective and stable business infrastructure, free from unnecessary regulation and complexity.

The Effectiveness of Measures put in place by the UK Government to tackle the Impact of the Banking Crisis and to Aid Recovery in Scotland. 22. Government initiatives, such as the Credit Guarantee Scheme and Special Liquidity Scheme, were welcome initiatives that provided confidence and liquidity at a time of market failure. In addition, moves to recapitalise some UK banks have helped to maintain credit availability and overall market stability. 23. The UK Government launched the Enterprise Finance Guarantee (EFG) Scheme in January 2009. This was launched as part of its programme to help the cash flow, credit and capital needs of small to medium sized businesses. Clydesdale Bank was active in bringing this scheme to the attention of customers that could potentially benefit from it. While Clydesdale Bank has approximately a 3% market share of UK SME lending, it has already lent over 8% of the funding provided under the EFG scheme. 24. In Scotland, the public sector has a strong track record in seeking to engage, understand and support the financial services sector in Scotland. A number of other banks are participating in the PACE initiative and the recently established Finance Sector Jobs Task Force is working with some employers to respond to current pressures within the industry. 25. These specific initiatives build on the support to employers that are available as a matter of course through Scottish Enterprise, Scottish Development International, and the Financial Services Advisory Board. 26. Scotland is home to a broad range of financial service employers operating across the whole of the sector, many of who remain competitive and active in international markets. While business strategies will be a decision for individual companies, it is essential to maintain Scotland’s position as an attractive location for investment. 27. A key attraction of Scotland as an international business location is the depth and diversity of its labour pool. In order that this is maintained, skills development initiatives of publicly funded organisations need to be aligned to the changing needs and priorities of Scotland’s financial services employers to inspire an improvement in talent at all levels of the existing and emerging workforce and to maintain a “pipeline” of flexible and available talent. September 2009

Memorandum from CBI Scotland Comments 1. The CBI is the UK’s leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With oYces across the UK, as well as representation in Brussels, Washington, Beijing and Delhi, the CBI communicates the British business voice around the world. The CBI’s membership includes over 130 financial services firms, including all the major UK clearing banks, many major UK insurers and asset managers, and most of the major UK Private Equity firms. 2. We welcome the opportunity to contribute to the Scottish AVairs Committee’s inquiry into banking in Scotland. 3. However, we are concerned that there has been considerable cross-over and duplication in the focus of this inquiry and that of the Economy, Energy and Tourism Committee’s “The way forward for Scotland’s banking, building society and financial services sector” inquiry at Holyrood.13 In particular, both Committees are investigating access to credit, the international reputation of Scotland’s financial services sector and the eVect of recent diYculties on jobs within the sector. CBI Scotland values the work of both Committees,

13 http://www.scottish.parliament.uk/s3/committees/eet/inquiries/banking/Bankinginquiry.htm Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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submitting regular written and oral evidence at Holyrood and Westminster, and would have preferred to see both Committees liaising to agree diVerent areas to investigate or working jointly in order to avoid unnecessary duplication. 4. The remainder of this submission will address the specific areas in which the Committee has decided to extend its inquiry.

The Effect of the Banking Crisis on Jobs,Banking Services to the Public and Small Business Lending in Scotland Employment/Jobs 5. CBI Scotland does not formally collect employment and skills data that is specific to the financial sector. Recently published documents record employment levels in financial services in Scotland as: — 9% of the UK total over 2006/07;14 and — the Scottish financial services industry employs 96,000 (4% of total Scottish employment) with the majority of this employment being in retail banking and insurance and pensions.15 6. The financial services sector in Scotland has a diverse skills base, employing people across many diVerent professional functions, requiring diVering levels of education. As it appears Scotland will retain many head oYce functions and has a growing service centre reputation and share, it is important not to overreact to changes in future employment levels and skills base. Inevitably, as banks merge and rationalise, there will be job losses at both headquarters and within branches. However, one possible concern might be a short term reduction in graduate employment schemes within the sector, aVording graduates fewer opportunities to develop their skill sets and pursue and progress careers within financial services. Financial service firms may, as a temporary option, also oVer flexible working arrangements for some current staV so that their skills and experience are not lost to the individual firm completely. 7. During a time of uncertainty for many who are currently employed within financial services, it is important to emphasise that Scotland’s global reputation for education and skills and talent within the financial services sector will also help to retain and attract further employment (this will be further supported by the creation of a Financial Services Skills Gateway—the work on the proposal for a FSSG was led by CBI Scotland’s Chairman and has received support from the First Minister). For example, Tesco Personal Finance has recently announced that it is set to create over 800 jobs in Scotland with the opening of a new customer service centre in Glasgow, a vote of confidence in Scotland’s financial services industry.16 8. CBI Scotland would also draw the following conclusions on employment/jobs: — There will be a continued reduction in the employment level within Scotland’s financial services sector, mainly focused in banking, as a direct impact of organisational restructuring, as well as their supply chain of professional services firms. Although regrettable, it is important that recently merged banks and those that have been subject to government intervention are able to identify eYciency savings if they are to be successful and repay the tax payer. It is also important to acknowledge that not all banks are progressing through a period of restructuring and in other, non- banking; areas of financial services, firms located within Scotland are increasing their levels of employment.17 — Edinburgh and the Lothians will experience the greatest proportion of job losses, given the significant banking operations currently located there.18 — There will be fewer headquartered financial service organisations in Scotland. However, it is important to emphasise that Scotland will retain some headquarters and head oYce functions of banks which will be controlled from elsewhere and that the banking sector generally constitutes only part of financial services. There are less dramatic, if any, changes to headquartered functions in other financial service areas. — Not all restructuring changes will be to the detriment of Scotland’s financial services sector. For example, Lloyds Banking Group recently announced that, after a review of its asset management businesses, the Group intends to transfer the investment management of the funds sourced from the Group’s Halifax and Bank of Scotland bancassurance businesses, the Bank of Scotland wealth management operation and the Clerical Medical intermediary franchise from Insight Investment to Scottish Widows Investment Partnership (SWIP). SWIP will become a centre of excellence for

14 The strategy for the Financial Services Industry Report—2009 Annual Report, The Scottish Government, page 21. 15 UK International Financial Services—the future, a report from UK based financial services leaders to the UK Government, May 2009, page 20. 16 Announced on Thursday 20 August 2009. 17 Tesco Personal Finance has recently (August 2009) announced their intention to create 800 more jobs in Glasgow as has insurance firm esure who announced the creation of 500 additional jobs in Glasgow in February 2009. 18 The Scottish Government’s Chief Economic Advisor—Dr Andrew Goudie—stated in his State of the Economy Presentation on 21 August that Edinburgh and the Lothians was one of two areas particularly hard hit by rising joblessness (the other being Lanarkshire). Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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the Group’s asset management activity, based in Edinburgh. SWIP currently has £83 billion of assets under management and after the intended transfer of approximately £42 billion from Insight this will increase to approximately £125 billion.19 — Banking amalgamations are not a new phenomenon in Scotland and further a field, having occurred many times before. The sector has adapted before and will again as current restructuring processes continue.

Lending 9. The results of CBI’s most recent, UK-wide, Access to Finance Survey20 suggest that financing conditions did improve in the three months to July. The survey results demonstrate that finance availability for new credit lines rose in the three months to July, while the availability of existing credit remained broadly flat. These trends are expected to continue in the coming three months. 10. The increase in availability for new credit lines was mainly driven by the loosening of conditions for very large organisations, with a modest increase in availability for SMEs. 11. The Access to Finance Survey also indicates a marginal rise in the availability of bank loans. This is an encouraging move in the right direction and verifies the banks’ message that they are open for business and lending. The immediate pressure facing some of Scotland’s banks to cut costs had implications for employment within the banking sector in Scotland. This shall be explored in more detail later in this submission. 12. Cost of credit continues to be an important issue for CBI Scotland’s member organisations. Half of members surveyed in our UK-wide Access to Finance Survey reported an increase in the cost of new credit in the three months to July. Arrangement fees and the administrative burden of accessing new finance continued to add to the costs incurred by businesses. 13. For those organisations using trade credit insurance, availability has continued to deteriorate markedly in the three months to July for all sizes of organisation. Current economic conditions and sharp losses have led trade credit insurers to re-evaluate their exposure and review credit lines, which has resulted in some restrictions or withdrawals of cover for firms in “riskier” sectors such as non-food retail and construction. This has happened as enquiries for trade credit insurance have risen. 14. Overall, finance conditions continue to have a negative eVect on a number of business areas. Capital investment and staV numbers continue to be heavily aVected, although the damaging eVect of the lack of finance on mergers and acquisitions does seem to be easing.

The effect of the Failure of Scottish Banks and Building Societies on the International Reputation of Scotland’s Banking Sector International Reputation 15. There could be an adverse eVect on Scotland’s reputation within banking but it would be wrong to suggest that the strong Scottish reputation of other financial service sectors, such as insurance and fund management industries, have been aVected to the same extent. Edinburgh, for example, is still a leading international financial centre and Europe’s fifth largest. A cluster of financial firms has formed around the city, with particular strengths in asset management, life assurance and pensions.21 16. Scotland, like all global financial centres, is now challenged with re-building reputation and trust, both locally and internationally. CBI Scotland recognises the high level of activity that has taken place over the past year by financial service firms individually and by the sector as a whole to achieve this. Initiatives such as FiSAB22 have worked well and have shown what can be achieved through cooperation. 17. There is a real danger that, when considering Scotland’s reputation as a global financial services centre, we are too pessimistic. It is important to acknowledge that the financial services sector in the UK is still seen more positively outside of the UK than inside and Scotland’s hard won reputation among the global financial services sector has not been irreversibly damaged. The perception of competence and trustworthiness will, in time, return to levels associated with the financial services sector prior to the banking crisis.

Looking Ahead 18. Scotland has a critical mass of skills within financial services, built over many years of success and growth. Our universities aVord financial service firms access to excellent young talent and this has not changed. They understand what the financial services sector requires of those entering the workforce and this particular aspect of reputation remains intact.

19 Corporate Communications, Lloyds Banking Group, August 2009. 20 http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/9536d035971117c680257607003a27b1? OpenDocument—Press Release 10 August 2009. 21 UK International Financial Services⁄the future, a report from UK based financial services leaders to the UK Government, May 2009, page 32. 22 FiSAB is a collaboration between the financial services industry, trade unions, the Scottish Government, Scottish Enterprise and Universities Scotland. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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19. Scotland retains a diversity of oVerings within financial services such as fund management, investment trusts and professional services firms to name a few. The country has also established a strong reputation as a leading international centre for customer service solutions ie contact centres. Scotland’s expertise in “back oYce” functions, particularly in Glasgow and Edinburgh, certainly has scope to develop further. The onus will be on the Scottish arm of large financial institutions to sell internally the virtues of locating and retaining functions in Scotland and on organisations such as Scottish Development International to promote the message that Scotland’s financial services sector is still strong and open for business.

20. It is natural to be tempted to focus more locally in the aftermath of the banking crisis when making lending decisions. Some may even suggest that focusing locally and addressing domestic market issues should be the priority before seeking to achieve global ambitions. However, the Scottish financial services sector encompasses other aspects and areas, such as fund management, and these will undoubtedly continue to retain a global perspective. Scottish based firms must also be encouraged to benchmark their performance against international peers and continue to seek to win business overseas, so a global perspective remains critical. Ultimately, businesses in the sector will behave commercially, operating globally when and where appropriate and commercially sensible.

21. It is encouraging that “new” banks are continuing to choose Scotland as a place to locate and it must be promoted as a “good news” story internationally. There is an opportunity for this particular aspect of Scottish financial services to be promoted as a hub of excellence internationally.

22. Scotland’s international reputation for quality and availability of workforce is certainly a strong factor in this and will, to some extent, alleviate the jobs losses that the sector is experiencing. There is also a good supply of related support services locally for “new” banks to draw upon. Anecdotal feedback also suggests that the Scottish accent of operatives and customer awareness are both strengths.

23. Businesses are also aware and encouraged by the improving transport connections within Scotland, such as the M74 extension, Edinburgh Tram Link Project and Forth Replacement Crossing. In addition to internal transport links, links to London and other key financial centres must be retained and improved. Specifically, landing slots from Scottish airports into Heathrow must be protected. It is also an opportune time to revitalise the Air Route Development Fund to support this.

24. Looking ahead, if Scotland is to continue to attract “new” banks to invest here, we must be aware of any inward investment opportunities and be prepared to pursue them vigorously with incentives such as RSA Grants and by promoting our pool of talent, experience and expertise. There should be a concerted eVort to promote Scotland’s recent successful relationship with “new” banks with all who have Scotland’s interests at heart acting as ambassadors in this respect. 22 September 2009

Memorandum from the Scottish Trades Union Congress 1Introduction 1.1 The STUC very much welcomes the opportunity to provide further evidence to the Banking in Scotland inquiry.

1.2 The following written submission is drawn in large part from the STUC’s recent submission to the Scottish Parliament’s Economy, Energy and Tourism Committee Inquiry, The way forward for Scotland’s banking, building society and financial services sector. The full submission, including views on the causes of the banking crisis, is available on both the STUC and Scottish Parliament websites.

2. The Banking Crisis 2.1 The 2008 global banking crisis of which the problems in the Scottish banks and building societies were a part, represented, the STUC would argue, the inevitable implosion of the “financialised” economy. Whilst we cannot claim to have predicted the timing, scale and pace of events over the past year, the STUC can point to a consistent track record in questioning the sustainability of the economic model promoted by governments of all hues over the past 30 years.

2.2 Both the scale of the crisis in UK banks and the extent of its impact on the wider economy and ordinary workers are already being deliberately downplayed by those who will benefit from a “return to normality”. The opportunity for a fundamental overhaul of a failed economic and social model is in danger of slipping away before the implementation of any meaningful reform. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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2.3 Therefore, the STUC believes it is essential that, at the very least, the public consultations and inquiries currently underway result in transformative change in the way the sector is regulated and banks managed. The financial sector must return to performing its basic functions eVectively: mobilising savings, allocating capital and managing risk, transferring risk to those more able to bear it. 2.4 In doing so, the STUC believes that the financial services sector, including the banks, in Scotland can continue to be a key provider of quality, sustainable employment. The STUC believes that any reputational damage inflicted on the Scottish financial services sector is repairable. The aspiration must now be to rebuild a banking sector which supports rather than undermines the wider economy.

3. Impact of the Banking Crisis 3.1 The impact has been severe. The global economic recession of 2008–09 is directly attributable to the credit crunch which began in summer 2007 as the housing and credit bubbles in the US and UK burst spectacularly. The impact of the credit crunch rapidly intensified following the collapse of Lehmans. 3.2 In Scotland, in the year to June 2009, employment has fallen by 54,000 and ILO unemployment risen by 75,000.23 The unemployment rate for Scotland has risen by 74% over the year to June. The corresponding figure for Edinburgh and the Lothians is 92%. In Lanarkshire it is 108%. 3.3 The fall in GDP is now apparent in Financial Services which showed a decline of 4.4% in Quarter 1 2009.24 Interestingly, the sector was still growing in quarter 4 2008 (2.2%). The greater impact of the recession on manufacturing is clear from the figures: a decline of 4.6% in quarter 4 2008 was followed by a further decline of 6.3% in Quarter 1 2009. The quarter 1 2009 GDP statistics confirm that the recession is aVecting nearly all Scotland’s key industrial sectors. 3.4 It is diYcult to provide accurate figures for job losses/gains in Scotland’s financial services sector over the past year. The drip feed of job losses in RBS and Lloyds Group has been at least partially oVset by new investments. Trade unions initially estimated that job losses in the banking sector following the crisis could be between 10–30% and it is diYcult at this stage to provide a more accurate figure. 3.5 The impacts extend beyond what can be easily quantified in growth and employment statistics. Those who are lucky enough to retain employment face increasing levels of economic inequality and insecurity, and real wages for ordinary workers will continue to stagnate (laying the grounds for another credit bubble?). There is a widespread lack of faith in the current model of globalisation to produce fair outcomes in both developed and developing nations and societal pressures associated with the rise of a super-rich class continue to grow. 3.6 The upfront costs of rescuing the banks are proportionately higher in the UK than any other OECD country. The scale and pace of decline in the economy has resulted in a huge drop in government revenue. Contrary to popular perception, this year’s deficit is largely attributable to the costs of the bank rescue packages and falling revenues; not discretionary stimulus measures.

4. Effectiveness of Initiatives Undertaken by the UK Government and Bank of England 4.1 Plenty of evidence on the availability and cost of credit is already in the public domain. The Scottish Government’s recent report25 found that the supply of finance has reduced and the cost has risen; findings confirmed by a recent Bank of England (BoE) lending survey. The BoE also noted that “spreads and fees are reported to have risen in recent months”.26 4.2 These findings support the considerable anecdotal evidence the STUC has received over the past year from trade union oYcials and workplace representatives. There can be little doubt that job related investment has suVered in Scotland as a result of the banking crisis. 4.3 The STUC has generally been supportive of the initiatives undertaken to date. The rescue packages of October 2008 and January 2009 may have left an unpleasant taste in the mouth, but there can be little doubt they were necessary to introduce stability and protect the wider economy. Similarly, with monetary policy having reached the limits of its usefulness, the BoE was correct to embark on a programme of quantitative easing and to extend it in August 2009. 4.4 It is diYcult to discern the impact of the initiatives undertaken to date. It is clear that business lending is not yet at a desirable level, but the position would undoubtedly be worse were it not for the action taken. 4.5 It must also be noted that problems with availability and cost of credit are also, at least in part, attributable to the retreat of foreign banks from the UK market.

23 ONS Labour Market First Release Scotland: August 2009. 24 GDP Statistics Quarter 1 2009, Scottish Government http://www.scotland.gov.uk/Publications/2009/07/GDP2009Q1 25 SME Access to Finance 2009, Scottish Government, July 2009. 26 Trends In Lending, Bank of England, July 2009. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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5. Potential Restructuring of the Scottish Banking Sector 5.1 The nature of restructuring of the banking sector in Scotland will be determined by a range of factors: — Convergence and contraction resulting directly from the recent crisis. For example, rationalisation within the Lloyds Banking Group and potential restructuring of global companies with a presence in Scotland; — Timing and nature of disposal of the Government’s stake in Lloyds and RBS; — Nature and extent of public sector support: of limited impact at this stage; and, most importantly, — Potential changes in regulation of the sector:itisdiYcult within the confines of this submission to do justice to the sheer weight of consultative activity which has recently reported or is currently underway. The Treasury Select Committee has reported extensively and the Turner Review has proved influential in setting the terms of the Treasury’s Review of Financial Markets and Sir David Walker’s Review of Corporate Governance (both currently ongoing). The FSA continues to consider how best to implement its code on remuneration. Nelly Kroes, EU Competition Commissioner is likely to continue taking a robust line on the lack of competition in the UK retail- banking sector. To this must be added the activity being undertaken by the G20 at global level. 5.2 Given that it is not possible in this submission to provide a detailed analysis of the above listed reports/ consultations, the STUC will simply highlight the following principles that we believe should underpin a sustainable regulatory response to the crisis: — Regulation by technocrats and industry insiders—such an approach invites industry capture. The STUC believes that the boards of regulatory institutions should, as a minimum, include trade union representatives if not a range of civic society interests; — Global action is essential to reduce risk of regulatory arbitrage—the G20’s progress has been slow and action taken wholly insuYcient; — There must be some separation of retail and investment banking—it is no longer acceptable for retail deposits covered by state guarantees to be used to fund speculative activity; — Action to address the bonus culture and the irresponsibility it generates is essential—this must move far beyond the proposed FSA code, which is in no way suYcient to deal with the scale of the threat posed by the incentivisation of irresponsibility in financial markets; — Regulators must have clearly defined roles and responsibilities and mechanisms for eVective collaboration must be established as a priority. Paying regulators at similar levels to the highest earners in the sector is neither necessary nor desirable. Regulatory bodies should be suYciently resourced and oVer quality employment and career progression; — Transparent arrangements for the trading of debt securities must be established; — Strong action is required to promote transparency in tax havens and secrecy jurisdictions; — Systemically important institutions in the shadow banking sector should be subject to regulatory oversight—indeed, there is strong case for the hedge fund sector to be brought into regulatory structures; and — Corporate governance and remuneration structures need to support sustainable long-term growth. 5.3 It is important to stress that the impact of even mild regulatory reforms is potentially huge given the potential for reduced profitability. Three points are crucial here: (i) Capital requirements: the Basel Accords are founded on the principle that banks must hold a minimum amount of capital (cash or liquid bonds) to match their risks. The Basel II treaty set a Tier 1 capital ratio of 4%. Banks found a way round this requirement by creating a “shadow banking system” where risks were parked oV balance sheet. This minimized capital requirements and boosted profitability. Therefore, even if regulators now only enforce a strict 4% limit, banks will find their opportunities to make profits severely limited. But the signals are that much higher ratios will be set: the British Government imposed a 9% ratio in October 2008 and the French Government quickly followed. (ii) Risk management: as this submission is being compiled in September 2009, the FT index is rising strongly. It appears cash provided to banks through capitalization and quantative easing is being speculated with; not invested. However, it is diYcult to escape the conclusion that banks are bound to become more risk averse. Regulation requires that banks calculate the risk side of the balance sheet using computer models based on available data. Prior to the crisis, the digital data fed into these models related only to the boom years. From this moment on, accurate data relating to the current crisis will have to be introduced into the models. (iii) Competition: the convergence in the sector, some of it forced by the need to maintain stability, has led to the creation of huge banks operating in a more concentrated market. It is inevitable in such circumstances that banks will face tighter controls on their profits. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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5.4 Consequently, it is sensible to anticipate even mild regulatory reforms producing potentially transformative results. In terms of what this might mean for financial services in Scotland: — A smaller sector—if not in real terms then relative to the economy as a whole—and one that is potentially much less profitable; — Greater role for the state—if we are to witness, for the reasons listed above, a shift towards low profit, utility style banking where banks are asked/forced to meet social objectives, people will legitimately question whether or not it would be more eYcient for the state to own key parts of the sector. Also, the STUC has long argued the case for a Scottish Investment Bank to support productive, long-term investment. The STUC also supports the People’s Bank initiative; — Fairer, more sustainable remuneration practices; — More stable utility banking; and — Changes in nature and quality of employment.

6. Employment and Skills 6.1 Strong growth in the financial sector during this decade suggests that Scotland must be providing an attractive business environment. It is important that the public sector continues to deliver the skills and infrastructure necessary to support the sector. It is essential that this support does not seek to placate the more extreme voices within the financial sector who do not appear to have been cowed by recent events. Threats of oVshoring of business services or whole firms for tax purposes, by institutions with a substantial public stake or who have benefited from public guarantees, should be treated with the contempt that they deserve. 6.2 The skills base remains strong and current activity underway through FISAB should help deliver the higher end skills necessary to support the sector. Recent inward investments such as Tesco Personal Finance provide hard evidence that the investment community has faith in the skills base. 6.3 Due to the extravagant rewards paid to executives and traders, there is a widespread misconception that wages and conditions in the financial services sector are well above average.27 Employment in the Scottish banking sector for the majority of staV has in fact been characterized by aggressive performance management practices using inappropriate target regimes. Counter staV have been incentivised to deliver sales while capacity to deliver eVective retail services has been diminished. Pension entitlements have been reduced whilst executives have lined their pockets. 6.4 It is important to note the serious concern of trade unions at the failure of the banks to revisit the target culture post crisis. Sales targets for frontline staV have not been reduced as a consequence of the crisis. Customers are still being sold products that could prove diYcult to repay; adding yet more fuel to the flame of the debt cycle. If staV do not sell these products, they will find themselves performance managed into unemployment. 6.5 It is diYcult to assess how these practices might change as the sector moves forward. Reduced profitability may threaten jobs, wages and terms and conditions unless prevailing attitudes over internal dispersal of wages change. 6.6 The STUC is clear that while the Government retains major stakes in RBS and Lloyds Group, it should exert control to match its shareholding. Further attacks on jobs, pensions, wages, terms and conditions should not be tolerated. There is also a growing fear that Scottish banks may revisit previous decisions not to oVshore back oYce operations and/or voice delivered services. 6.7 The STUC supports UNITE’s campaign for a social contract for financial services.28 6.8 A range of activity overseen by FISAB and the Finance Sector Jobs Taskforce is currently ongoing. The priorities for these bodies should continue to be: — retain maximum levels of employment in the industry; — redundancy response—in the first instance this should involve negating the need for job losses in the first place but where this is not possible, eVective redeployment with other firms. It is essential that employers are open and honest about emerging redundancy situations to allow the public sector to assist the staV aVected; — skills—in its 2009 Annual Report, FISAB lists strengthening the world class workforce as one of its key aims. It is essential that the partnership approach continues to deliver added value; and, — inward investment—SDI has sensibly approached the global crisis as an opportunity rather than a threat; the evidence is in the investments already announced. It is essential that SDI continues to work with the industry to deliver new investment for Scotland.

27 http://www.unitetheunion.com/pdf/Myths%20v%20reality.pdf see UNITE’s Pay⁄Finance sector employees: myth vs reality. 28 http://www.amicustheunion.org/pdf/Job%201585%20finance%20Social%20contra%20V3.pdf Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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7. Scotland’s Reputation as a Global Financial Services Centre 7.1 No financial centre has escaped the recent turmoil—the argument can be made that Scotland’s reputation for financial probity has been damaged, but what of our neighbours in Iceland and Ireland? Or the City, Wall Street and Frankfurt? 7.2 For those considering hard-nosed investment decisions, any fuzzy concerns around Scotland’s reputation for financial probity will more than likely be outweighed by the UK’s well-established reputation for security and property rights: the UK is currently fifth out of 181 countries on the World Bank’s ease of doing business rankings.29 This ranking is assessed on performance on 10 sub-indicators: the UK is currently ninth out of 181 countries on “protecting investors” and 24th out of 181 countries in “enforcing contracts”. 7.3 Scotland should continue to diVerentiate and promote itself as a financial services centre on the skills base and quality of service provided. Whilst it is sensible to emphasise Scotland’s advantage over London, it makes little sense to market Scotland simply on the basis of lower costs. 7.4 Recent investment decisions suggest that Scotland remains an attractive location for investment: primarily due to the skills base and the cost advantage over London. The regulatory regime has of course been attractive to financial services companies. For reasons that should be self-evident, the STUC would caution against continuing to promote Scotland on the basis of light-touch regulation. 7.5 Ongoing consonance with the UK regulatory regime is desirable. 18 September 2009

Memorandum from Unite the Union This response is submitted by Unite the Union. Unite is the UK’s largest trade union with two million members across the private and public sectors. The union’s members work in a range of industries including manufacturing, financial services, print, media, construction, transport, local government, education, health and not for profit sectors.

Executive Summary — the eVect of the banking crisis has been acutely felt in Scotland with around two thousand jobs lost within the sector since the beginning of 2009; — the impact of the crisis is further reflected in a lack of confidence in the sector by businesses and consumers, low morale among the workforce and public mistrust of banking executives; — restructuring within companies is increasing stress and anxiety among the workforce who are already demoralised by events; — continuous announcements of job losses across the sector is causing considerable damage to the reputation of the sector and is doing little to instil confidence for Unite members or in rebuilding trust in consumers; — competition in the sector has contracted with consumers now having access to a reduced level of financial services and products; — it is vital for Scotland that those companies with headquarters in Scotland should stay headquartered in Scotland and this must remain a key strategic priority for the Government; and — Unite believes that it is necessary to improve public interest representation within companies but also within the agencies which regulate the sector to actively engage stakeholders in the decision making process.

Introduction 1. Unite welcomes the opportunity to respond to the Scottish AVairs Committee call for further evidence on Banking in Scotland. Unite is well placed to respond to this call for evidence as it represents thousands of finance sector workers across Scotland in all grades and all occupations, in banks, investment banks, insurance companies, building societies, finance houses and business services companies. 2. The Scottish finance sector has been an economic success story performing well in recent years. The sector contributes around 8% to the country’s output and employs approximately 90,000 people.30 The eVect of the banking crisis has therefore been acutely felt in Scotland with 2,200 jobs lost within the sector since the beginning of 2009,31 as well as the knock on eVect of job losses in other sectors of the economy as the recession bites. According to the latest reports the unemployment figure for Scotland is 187,000.32

29 http://www.doingbusiness.org/EconomyRankings/ 30 Strategy for the Financial Services Industry in Scotland 2009 Annual Report. 31 Figures provided by ONS according to SIC 65-67 Financial Intermediation, Insurance and Auxiliary Services. 32 http://www.scotlandoYce.gov.uk/scotlandoYce/12661.html Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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3. The impact of the crisis is further reflected in a lack of confidence in the sector by businesses and consumers; low morale among the workforce as they hear of job losses in the sector on an almost weekly basis; an inability of businesses to access credit and public mistrust of those who have awarded themselves with seven figure salaries and pensions while leaving in their wake a badly damaged and considerably weakened finance sector. 4. Banks are embarking on massive restructuring programmes with non-core parts of the business being sold oV to generate income. Royal Bank of Scotland has agreed a $550 million (£327m) deal with Australia and New Zealand Banking Group for its Asian businesses.33 This is evidence of the huge upheaval being felt across the sector by Unite members which is increasing stress and anxiety among the workforce who are already demoralised by events. 5. Unite would argue that the continuous announcement of job losses across the sector is causing considerable damage to the reputation of the sector and is doing little to instil confidence in the future for Unite members in the sector or in rebuilding trust in consumers. Unite recognises that many companies are in the throws of restructuring with cutting costs a priority. Unite will continue to work with companies within the sector to limit the impact of the restructuring on any job losses by pursuing voluntary arrangements and redeployment for our members wherever possible and by avoiding compulsory redundancies.

Small Business Lending and Competition 6. The lack of credit is also having a dramatic eVect on small businesses with the Federation of Small Business reporting significant redundancies in SMEs across Scotland. Crucially oYcial Scottish Government statistics show that Small and Medium-sized Enterprises (SMEs) now account for 99% of all Scottish businesses and for over half of all private sector employment.34 The impact of a lack of liquidity in the financial markets and the aVect on the SME sector is contributing to the increase in unemployment in Scotland. 7. Despite claims that the banks are doing all they can to get the economy moving Federation of Small Business (FSB) research shows that around a third of small businesses consider their bank to be less helpful than before the downturn. A further 60% there has been no change in the banks’ attitudes to providing finance in the form of loans and overdrafts, despite the diYcult economic period. While more than half of small firms prefer to communicate in person with their bank, rather than by letter, online or over the phone, many have seen their relationship with their local branch manager deteriorate over the past few years.35 8. The crisis has also impacted on competition on the high street, with consumers having access to a reduced level of financial services and products. Recent mergers and takeovers within the finance sector has limited choice for consumers. The takeover of HBOS by Lloyds TSB to form Lloyds Banking Group has created an organisation which controls 30% of all current accounts, mortgages and savings accounts in the UK. The merger of Co-operative Bank and Britannia Building Society and Alliance and Leicester and Bradford and Bingley with Group Santander has further restricted competition and choice for consumers. 9. A further eVect of the banking crisis on consumers is the availability of credit in the mortgage market. According to the Council of Mortgage Lenders house prices in Scotland have fallen sharply and mortgage repossessions have increased significantly. Mortgage lending has also declined significantly since 2007, although recent figures from the CML appear to show a rise in house purchase loans in Q2 of 2009 which may point to an upturn in the market.36

Long Term Impact 10. It is diYcult to estimate the long term eVect of the failure of Scottish banks and building societies on the international reputation of Scotland’s banking sector. However with the Dunfermline Building Society, RBS and HBOS (now part of Lloyds Banking Group) all in receipt of Government funding headquartered in Scotland, inevitably questions may be raised regarding Scotland’s distinguished history as prudent, stable and successful. Unite believes it is crucial to maintain finance headquarters in Scotland to enhance Scotland’s position on the international stage as well as delivering economic benefits to the economy. It is therefore vital for Scotland that those companies with headquarters in Scotland should stay headquartered in Scotland and this must remain a key strategic priority for the Government. 11. It should be highlighted that Scotland continues to have a successful finance sector made up of insurance companies, asset management and investment banking and the mistakes made by some sections of the sector should not tarnish the otherwise excellent reputation of others. Scotland also remains a prime location for inward investment by International financial services companies, where the quality of the workforce is highlighted as a key determinant of location choice.37

33 www.rbs.com 34 http://www.fsb.org.uk/default.aspx?id%0&loc%scotland 35 http://www.fsb.org.uk/News.aspx?loc%scotland&rec%5217 36 http://www.cml.org.uk/cml/media/press/2380 37 http://www.sfe.org.uk/about-industry/ Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Effective Measures 12. Unite welcomes the Scottish Government’s decision to establish a Job’s Taskforce as part of the Financial Services Advisory Board (FISAB) to work with companies to limit the impact of the recession on job losses across the sector through partnership working with the public sector and trade unions. Unite has found this to be a successful initiative and one which has brought all sides together for the benefit of the sector and the employees who work within it.

13. Unite also has experience of working with organisations such as Partnership Action for Continuing Employment (PACE) who oVer an important link between employers, employees and the public sector by providing both practical and financial support to companies and advice and information to those aVected by redundancy. Unite has worked closely with PACE through the FISAB Jobs Taskforce. It is therefore important that the Scottish Government continue to make funds available to ensure such initiatives are maintained.

14. Unite is disappointed that excessive remuneration packages continue to be awarded to senior level executives in those companies who are partly owned by the Government and where influence could be wielded. The news that RBS has appointed two senior executives on remuneration packages amounting to around £10 million. This has raised concern with our members who see a “business as usual” attitude at the highest level with little intervention by UK Financial Investments (UKFI) to control such pay awards.

15. While Unite notes that the Government has castigated the banks on excessive pay,it may be necessary for the Government to put in place legislation which will require companies to be more responsible, transparent and realistic when it comes to remuneration and bonus for senior executives and directors.

16. Unite believes that it is necessary to improve public interest representation at a corporate level within the company and within the agencies which regulate the sector to actively engage in the decision making process and to oversee corporate governance principles. It is important that the stakeholder voice is heard. Unite has consistently argued for improved dialogue for trade unions and other stakeholders at boardroom level, including on remuneration committees and will continue to press the Government on this issue. 22 September 2009

Memorandum from the Law Society of Scotland A. Summary of Statistics Data from Registers of Scotland Volume of property sales The volume of sales transactions in Scotland during the second quarter of 2009 (April–June) was 16,231, a decrease of 47.8% compared to the same quarter last year.

Value of property sales The total value of sales across Scotland registered during the second quarter was over £2.3 billion, a decrease of 51.2% over the same quarter last year.

Average house price The average house price for Scotland over the second quarter showed a decrease of 6.5% when compared with the same period in 2008. The average price of a residential property in Scotland for this quarter was £145,553.

Data from Accountant in Bankruptcy in Scotland Personal Insolvencies There were 6,294 personal insolvencies in Scotland in the first quarter of 2009/10 (April–June). This figure represents an increase of 33% on the same period in the previous year.

In total there were 3,730 awards of bankruptcy, showing an increase of 31% on the same period in the previous year.

The number of Protected Trust Deeds recorded was 2,564 in total, an increase of 36% on the corresponding quarter of last year. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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Debtor Applications The Accountant in Bankruptcy received 3,097 debtor applications for bankruptcy in the first quarter of 2009–10.

Debt Arrangement Scheme During the quarter there were 316 Debt Payment Programmes approved, an increase of 83% on the same quarter in the previous year.

Company Liquidations and Receiverships The Accountant in Bankruptcy received 219 notices of Scottish registered companies becoming insolvent or entering receivership in the first quarter of 2009–10. This figure includes eight receiverships (an increase of 33% on the same quarter last year) 152 compulsory liquidations (54% increase) and 59 creditors’ voluntary liquidations (50% decrease).

B. Anecdotal Case studies of and commentary on the recent experiences of prospective borrowers of commercial lending funding, as provided by members of the society’s economic impact group Case Studies Case 1 A large farming client with substantial assets including land secured to Lloyds TSB and its subsidiary AMC had requested leeway or extended facilities to help over a short term until proceeds of harvest were received. Despite having considerable equity, possibly up to 50%, the Bank declined to help. This business has been in existence for at least 50 years and has a good track record. The flexibility was not there to help.

Case 2 Clients who were sellers/landlords in a commercial lease for minerals had agreed a deal and had arranged finance in principle. There were delays in the transaction but when the tenant went to the Bank the agreement was withdrawn.

Case 3 Clients were interested in purchasing closed Licensed Premises with a view to reopening. Agreement was reached in principle with the Commercial Division of Lloyds TSB. The price was reduced by agreement with the sellers as the licence required to be renewed under the new legislation but this did not present a problem as the Local Authority was very supportive as was the local member of the Board. The Bank however withdrew their oVer forcing the clients to arrange finance through a remortgage of their house.

Case 4 Clients were interested in purchasing a property and approached intermediaries who referred the case to the Royal Bank of Scotland. The Bank approved a loan in principle. A deposit or contribution was arranged and the clients’ accountant verified income which showed that the sums involved were sustainable. They then received a call from the accountant advising that the Bank had formed the view that they were unable to service the loan. This decision had not been intimated direct to the clients or the intermediaries.

Commentary The immediate economic impact of the credit crunch is manifesting itself in the south west of Scotland in the approach of lending institutions and particularly the Bank of Scotland in their annual reviews of lending with their commercial clients. Earlier in 2009 we saw a considerable number of commercial clients, particularly in the agricultural industry where we do have a strong client base, being oVered terms for facilities renewal which were clearly far less attractive than their existing terms. Typically the farmers concerned have all been longstanding Bank of Scotland customers with substantial borrowings, backed by very significant asset value. In general we would be talking about borrowings accounting for 60–70% of the gross asset value. Whilst the dairy sector has seen a recent decline in milk prices which aVects net income, that fall is against a background of recent substantial increase in the price for raw milk to the producer, so profitability should not be significantly less than in past years. Indeed, the ease with which these farmers have been able to find alternative borrowings from main stream banking sources would indicate that there is no underlying fundamental problem with the profitability of the businesses. Land prices particularly for good land suitable for dairy or beef stock enterprises have not been aVected to any extent at all by the recent decline in values for development land or for domestic housing. Hence the underlying main considerations in lending in the agricultural industry have not altered substantially, and it is an industry which traditionally has been insulated from the general economic fluctuations by virtue of subsidy or single farm payments which reflect the EU policy for support of Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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European agriculture. Indeed the European nature of the support has served UK agriculture well by setting support levels in Euros which, with the decline in value of the pound, has to have been positively beneficial to the industry. Against this background the Bank of Scotland particularly and Royal Bank of Scotland to a lesser extent in my personal experience have adopted an approach which would indicate either a wish to divest themselves of lending to this particular sector or to rebuild their balance sheets at the expense of this industry by demanding of them fees for annual reviews, arrangements fees and levels of interest on facilities which are so far out of line with past practice that customers (who in the agricultural sector tend to have a degree of loyalty) have sought better terms elsewhere. It is a reflection of the solidity of these customers that they have found no great diYculty in obtaining alternative facilities at an acceptable level. We carried through a series of refinancing transactions where dairy farmers moved from the Bank of Scotland to Barclays Bank. The repayment of borrowing to Bank of Scotland would be in excess of £6million for a number of farmers. The Agricultural Manager of Barclays Bank remarked to me that he could not understand why the Bank of Scotland had been prepared to see these clients move as each and every one had an impeccable borrowing history, meeting all repayment obligations timeously without ever exceeding agreed borrowing limits. We have seen evidence of a similar attitude with other businesses (though I would be less able to vouch that many of these were as “good risks” as the agricultural clients) but the underlying approach remains the same. Increased borrowing costs are of course a burden which becomes even less avoidable for business where due to the weakness of the business the opportunity to change lenders is not an option. The restrictions of lending and indeed the reduction of facilities in circumstances where more support is required, not less, have sent some business over the brink into failure. No doubt Banks may argue, in assessing a higher level of risk to themselves, that in restricting the lending they were legitimately limiting their exposure to a failing business; though in cases I have seen it is perhaps chicken and egg. In the case of my own firm we had banked with the Bank of Scotland for my whole time in practice of some 35 years and my predecessor’s before that. In the small towns in which we operate the level of funding passing through our accounts on behalf of clients must make us one of the more substantial accounts which the Bank had. As a firm we are well funded though the retiral and pay out of one partner and the expansion in the purchase of two oYce buildings meant that from time to time we had need of a level of borrowing. The facilities were secured by Standard Securities over three oYces, with two unencumbered. Our profitability has been slightly aVected by the economic downturn but the impact has been blunted by internal reorganisation. Notwithstanding this, when faced with our annual review the arrangement fees and interest rate demanded were in our view beyond justification. Our risk profile had not altered and the only reason we could see for the increases was that the Bank needed to rebuild their balance sheet and as a profitable business we could “aVord” to assist them in this process. We found no diYculty in securing the level of borrowings we required from Clydesdale Bank, securing the same level of facility for a third of the arrangement fee and an overdraft rate 1.5% less and without any security being granted. The foregoing is simply my own experience of the approach of diVerent Banks as they operate in our practice area. The conclusions are only my own. It would be fair to state that the case studies quoted relate to the first half of 2009 and I have seen less evidence in the last quarter, though the reasons for that may not reflect any great sea change in the Bank’s approach in recent months just a lesser level of activity amongst my own clients. 22 September 2009

Memorandum from Lloyds Banking Group Executive Summary 1. Lloyds Banking Group (“LBG”) is one of Scotland’s largest private sector employers and a major contributor to the Scottish economy. Our registered oYce is in Edinburgh and our Scottish headquarters are at The Mound. Our main brands in Scotland include Bank of Scotland (“BOS”), Black Horse Finance (“BH”), Scottish Widows (“SW”) and Scottish Widows Investment Partnership (“SWIP”). 2. We found our engagement with the Scottish AVairs Select Committee earlier this year productive and we welcome the opportunity to assist the Committee further with its inquiry into Banking in Scotland. 3. We note the three areas in which the Committee has decided to extend its inquiry and we have attempted to deal with those areas in turn in addition to providing a summary of LBG in Scotland.

About Lloyds Banking Group in Scotland 4. LBG is the parent company for a number of eminent Scottish companies and brands. Bank of Scotland and Scottish Widows will be our flagship brands from now on with BOS operating as LBG’s high-street branch and business bank in Scotland and SW operating as our life and pensions brand throughout the UK. 5. Although we are going through a major integration programme, we remain one of Scotland’s largest employers and its largest financial services employer with well over 20,000 staV including a large number of highly-skilled and senior executive roles. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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6. We have Scotland’s largest network of high-street bank branches and fee-free ATMs, including several mobile branches in rural areas of Scotland.

7. Scotland is also headquarters to the Group’s UK-wide Insurance Division and in addition, around one-fifth of the top 500 LBG executives work in Scotland reflecting the extraordinary pool of talent that exists in Scotland’s financial sector and the emphasis LBG places on having a significant presence in Scotland. The Mound is the Group’s Scottish Headquarters and will be the Registered OYce for the Group as a whole. We will continue to hold our AGMs in Scotland.

8. LBG is, and will continue to be, a substantial investor in Scotland’s communities, donating grants, undertaking charity work and sponsoring community events such as the Great Scottish Run—Scotland’s largest mass participation outdoor event. We believe that we have a social as well as an economic role in Scotland and we take it very seriously.

Jobs,Competition and Lending 9. Lloyds TSB (“LTSB”) and Halifax Bank of Scotland (“HBOS”) oYcially came together as LBG on 16th January 2009. Our integration programme—one of the biggest ever undertaken—is proceeding well and is ahead of schedule. We have generated over £100 million of cost savings in the first six months which is an important step in the right direction as the Group strives to return to profit.

10. Some of the announcements we have made in the last six months have regrettably involved a reduction in the number of roles across Scotland. This is an unfortunate consequence of the new Group eliminating the inevitable duplication which existed when LTSB and HBOS came together. We have worked with our colleagues and the trades unions throughout the process of these announcements and we are exhausting every avenue in order to minimise compulsory redundancies.

11. The landscape of both personal and business banking in Scotland will change over the coming years as LBG combines the BOS and Lloyds TSB Scotland (“LTSBS”) high-street branch networks and business/ corporate banking operations. Similarly, Santander has announced that its Abbey, Alliance & Leicester and Bradford & Bingley brands will combine under the Santander name.

12. Although this will clearly reduce the number of competitors, it is important to establish a context. This time last year, BOS, Royal Bank of Scotland (“RBS”) and Clydesdale Bank (“CB”) dominated the business banking market. The brands which will be removed from the market, including LTSBS, had a very small market share and now the market looks broadly the same. Indeed, the addition of LTSBS to the BOS operation still isn’t enough to take BOS above RBS in market share.

13. On the high-street, the combination of the LTSBS branch network with the BOS branch network will lead to some branch closures. However, we believe the sector will retain its competitiveness. Competition is still strong in urban areas for example with Clydesdale, HSBC, Barclays, one or more Santander brands and Nationwide as well as higher use of Internet competitors. Some of these banks have announced an intention to expand and with the possibility of new entrants into the market, we believe that competition will remain healthy. In more rural areas the mainstay of the market tends to be BOS and RBS, which will not change. A competitive landscape is good for the customer and good for us. We will only grow our business by being the best bank for our customers.

14. There has been a contrasting story on lending across LBG in the last 18 months. HBOS had severe liquidity problems during 2008, which meant that it had major constraints on its ability to lend money. However, LTSBS had no such liquidity issues and substantially increased its lending in both areas during 2008, albeit from a far smaller base. Overall, lending to homeowners increased during 2008, whilst lending to SMEs fell by a low single-digit percentage.

15. The situation has begun to change recently. Due to the stability of the new Group, BOS is now able to lend once again to its business, commercial and corporate customers and the pipeline is up and running. In addition to “standard” lending, BOS is an active participant in the government’s Enterprise Finance Guarantee Scheme (“EFG”) and is helping Scottish companies through new lending and through its Business Support Unit (“BSU”), which helps to turn around struggling businesses.

16. We do feel, however, that it is important to place lending levels in their proper context. There is considerable public pressure on banks which are in receipt of taxpayer funding to simultaneously lend money to those who need it and to lend responsibly in order to mitigate against future losses for individuals and for the Group. Whilst in the current climate we occasionally attract criticism for not lending to individual businesses or homeowners, we have emphasised that we make decisions according to the strict, prudent risk profiles which LBG inherited from LTSB. The best way for us to protect and repay taxpayer funding, as well as to protect Scottish jobs, is to be able to compete commercially and make commercial lending decisions in the interests of the Group even if that sometimes means declining funding requests. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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International Reputation 17. With the other major Scottish bank—RBS—also in receipt of government funding, there is no doubt that the focus in the UK fell primarily on Scottish banks however, this is not a structurally Scottish problem. The fact that the two UK banks which suVered the most were Scottish is not a reflection of their roots, but of those banks’ business models at the time. A number of other banks around the world suVered in a similar way.

18. LBG must now proceed with its integration and make the right decisions to protect the interests of our customers, our staV, our shareholders and the taxpayer. This is the only way for us to help enhance the reputation of our company and of Scotland as a global financial centre. Scotland remains a major financial sector with a highly skilled workforce. While we are in a period of major transition, there is no reason why Scotland should not cement its place as a hub for financial services and LBG is committed to playing a major part in ensuring that that is the case.

19. Our recent decision to transfer the investment management of funds sourced from our Halifax and Bank of Scotland bancassurance operations, our Bank of Scotland wealth management business and our Clerical Medical intermediary franchise from Insight Investment to SWIP underlines our confidence in Edinburgh and Scotland. SWIP will become a centre of excellence for the Group’s asset management activity and after the transfer will manage assets of approximately £125 billion.

20. We firmly believe that despite what has happened, Scotland remains a strong player in global finance. Firms in the insurance and asset management area have largely come through the recent crisis in good shape and most recent reports into the competitiveness of the financial sector have confirmed Scotland has maintained its strong position.

UK Government Measures 21. LBG was in receipt of UK Government assistance after the acquisition of HBOS by LTSB. This was both welcome and required and we believe that despite the cost to the taxpayer it served the best interests of financial stability and financial sector jobs in the UK as a whole.

22. The taxpayer currently owns just over 43% of the Group. Along with all UK banks in receipt of state aid, we are working closely with HM Treasury to demonstrate to the European Commission that the Group has a strong plan to exit state aid. At this stage it is too early to say what the result of this review will be. 23 September 2009

Memorandum from the Federation of Small Businesses, Scotland Introduction The Federation of Small Businesses (FSB) is Scotland’s largest direct-member business organisation, representing around 20,000 members. The FSB campaigns for an economic and social environment which allows small businesses to grow and prosper.

Small businesses are the backbone of the Scottish economy—SMEs represent 99% of Scottish businesses and provide 53% of private sector employment.

The FSB is pleased to submit its comments to the Scottish AVairs Committee on its inquiry into banking in Scotland.

We note the range of questions set by the committee. The FSB’s submission focuses on issues that are most pertinent to the small business sector.

1. Impact of Financial Crisis and the Availability of Credit It is clear that the turbulence on the world’s financial markets had an eVect on small firms who do business in the real economy. At the height of the financial diYculties the most pressing concern was that, across Scotland, perfectly viable small businesses faced serious cash-flow issues, compounded by a lack of aVordable credit. By October 2008 our members told us that they had begun to cut back on “non-essential” spending (advertising, training, capital investment). In December 2008, 20% indicated that they had had to reduce employee numbers; this had risen to 31% of employers in a recent survey.

Since October 2008, the FSB has regularly surveyed members to track the impact of the recession, including access to finance. A more detailed survey was undertaken in January 2009 by the Business School at The Robert Gordon University. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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Key points from this work are: — Data collected at the start of December 2008, based on the previous two months, indicate that this was the worst trading period for small businesses, with 64% reporting a decrease in trade. In August 2009 this figure has reduced to 47%, with 22% reporting an increase in trade. — An increase in payment times (from invoice to full payment) reached its peak in October 2008, with 41% experiencing increases. Since then this has held steady at approximately a third of businesses reporting an increase in payment times. — Around 30% of businesses consistently from survey to survey report an increase in the cost of existing credit (such as loans or overdrafts). — In the January survey, 22% reported that fees for overdrafts and loans had increased, with 55% saying the bank had not requested additional security, while 9% reported that it had. 32% reported that their bank had been less helpful. — In August 2009 67% of businesses reported they were not confident about the future prospects of their business, while 31% were quite confident—a slightly more optimistic response than was received earlier in the summer. The FSB welcomed the publication in July 2009 of a Scottish Executive study into SME Access to Finance. It found that there was a significant gap between the demand for finance from Scotland’s small businesses and the willingness of high street banks to provide it. Anecdotal evidence suggests that, while availability of funding may have eased, businesses continue to report an increase in fees and charges by banks. Despite many small businesses having very modest turnovers, small business banking attracts a range of charges and fees not seen in the competitive personal banking market, including, for example, charges for paying money into an account. In addition to substantial increases in arrangement fees for finance (with higher interest rates applied) as well as increased fees for renewals of existing overdrafts—essentially businesses are expected to pay for simply agreeing to continue an existing arrangement—and maintenance charges for unused overdrafts, businesses have recently begun reporting that banks are finding new ways to charge. In particular we have received complaints from businesses about banks asking for large sums of money as security for the use of credit card facilities by businesses. These sums can represent 10% of turnover or transactions and the business is given a short period of time to stump up the cash or have card facilities withdrawn, the money taken automatically from the account, or the account closed. The sudden influx of complaints on this issue to the FSB suggests a definite change in policy from banks, despite claims that this has always been standard practice.

2. Impact of Initiatives In October 2008 the FSB called for a Small Business Survival Fund to help businesses cope with the sudden and severe shortage of finance. In the 2008 Pre-Budget Report the Westminster Government announced a £1 billion Small Business Finance Scheme, which went live on 14 January 2009 as the £1.3 billion Enterprise Finance Guarantee Scheme. While certain elements of the scheme could have been improved (particularly around implementation), we warmly welcomed this initiative. On balance, we believe this fund has been successful, although demand peaked quickly. We also welcomed the flexibility oVered by HM Revenue and Customs by the establishment of their Business Support Service. Feedback from businesses suggests this intervention has been exceptionally helpful. Government figures suggest that 12,000 businesses in Scotland had been helped to spread payment of £214 million of tax payments since the service’s launch in November 2008. From a Scottish perspective, we welcomed the eVorts that are being made by many public bodies in speeding up public sector payment times. With cash-flow tight for many businesses, prompt payment for services can be a lifeline, especially at a time when large businesses were extending payment terms to their suppliers to unacceptable levels. We further welcomed moves to pass on prompt payment terms to sub- contractors, though this is harder to enforce. The reduction in VAT has been less successful, according to businesses. While many businesses saw a cost to adapting to the new rate of VAT (which will be repeated if the planned increase occurs), 99% of respondents to our survey in January 2009 felt the VAT reduction had no impact on their business. More recently,the UK government introduced the Financial Intermediary Scheme in England. This partly addresses FSB calls for a Corporate Mediator to engage with small businesses and banks. In essence, a Financial Intermediary will be supported in each Business Link area to assist small businesses to apply for finance and, crucially, to monitor access to finance and report back to government. The FSB is not aware of any similar function in Scotland. Some government interventions have therefore been more helpful than others. While significant funding diYculties remain for small and micro businesses, our evidence suggests that the situation has stabilised, rather than continuing to deteriorate. Returning the economy to growth will undoubtedly require additional intervention. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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3. Moving Forward A report published in September 2008 by the Scottish Government highlighted diYculties with SMEs accessing finance from banks. It further commented on the relationship between banks and small businesses. This report was based on findings of the Annual Small Business Surveys of 2005 and 2006, so it is clear that many of these problems existed long before the global financial crisis. Indeed, the FSB has believed for a long time that the SME banking market in Scotland suVered from lack of competition. With the new Lloyds group and RBS now responsible for the vast majority (some early estimates suggested 80%) of small business bank accounts, we now have serious concerns about the future of SME banking in Scotland. We are principally concerned that lack of competition will result in small business customers receiving a poor deal from banks. Furthermore, we are closely monitoring the impact on customer service of bank restructuring plans. Many FSB members in Scotland (particularly in rural areas) raise concerns that decision-making responsibility has been diluted in local areas. In certain parts of Scotland there is a strong sense that an understanding of the local/regional economy (including seasonal/sectoral issues) is necessary to make funding decisions which allow those fragile economies to operate. The FSB has called on our high street banks to restore decision-making powers to local branches. A poll of FSB members found that small businesses want to have a personal relationship with their bank when obtaining finance. Over half (54%) said they chose to communicate in person with their bank, rather than via letter, online or over the phone, while 86% said they believed decisions on lending should be made by a local branch, rather than centrally. The same poll found that a majority of businesses are dissatisfied with banks, although they still rely heavily on them. Following wide consultation with our membership, the FSB launched its seven principles of business banking, which we hoped high street banks would use when considering finance applications. The FSB Principles of Small Business Banking are: — fix costs on loans and overdrafts for the whole of 2009 if repayments and limits are not broken; — pass on base rate cuts in full to small business customers, and don’t change them to LIBOR (London Interbank OVered Rate); — make it possible for customers to switch accounts within five working days as written in the Statement of Principles; — all banks should take part in the European Investment Bank lending programme, along with the Government’s Enterprise Finance Guarantee; — consider all reasonable requests for finance from a small business and produce a letter of explanation if refused; — all documentation and contracts must be clear, fair and not misleading; and — finance penalties for the banks must apply where appropriate, if any of the above is not adhered to. The FSB feels that, while the current financial crisis has made SME finance issues particularly acute, in reality these problems have existed for years. With the ongoing restructuring of banking services, and the loss of a competitive SME banking environment, it is now time to consider whether additional funding mechanisms are necessary to support small businesses in Scotland and return our economy to growth. The FSB, together with a coalition of community groups and trades unions, has therefore called for the establishment of Post Bank, set up in the Post OYce network as an alternative to the big high street banks. This is designed to reverse the trend where the so called “lower margin activities” of business banking and small loans were de-emphasised. The Post OYce currently has a network of 11,500 branches across the UK. While this would not replace traditional high street banks, the creation of a Post Bank could answer the concerns around secure and equitable finance and the future of the Post OYce network. While this would need to be taken forward by the Westminster Government, we are also keen to look at how the role of the Scottish Investment Bank could be expanded. At present niche funding for R&D and innovation is unlikely to solve the mainstream financial requirements of small businesses. The potential of additional European funding (through JEREMIE) could open up new possibilities. We are in no doubt that the relationship between Scotland’s small businesses and the banks must be mended as quickly as possible. Entrepreneurs need confidence in order to take risks, innovate and create new jobs. Faith in the banking system is the bedrock for this confidence. As mentioned earlier, the FSB has recommended the creation of a Corporate Mediator to solve problems and facilitate dialogue in the banking and business community. The FSB proposal draws heavily on the French model, where the mediation service has a 64% success rate in helping viable small businesses access finance. The FSB proposes that the Corporate Mediator should not have powers to order banks to lend, but be neutral and trusted by all parties. Access to the Corporate Mediator should be free to those small businesses that have been filtered through a rigorous online questionnaire. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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4. Conclusion According to the latest Scottish Corporate Sector statistics, SMEs in Scotland accounted for 1.03 million employees in 2008. Comparing these with 1999 figures underlines the critical role played by small businesses as key employers. Small businesses were responsible for an additional 53,240 jobs over the 10-year period, more than oV-setting the decrease witnessed in jobs in large businesses (a decline of 24,750) over the same period. Small businesses will help pull us out of recession but they face particular diYculties accessing finance, which have been exacerbated by the global financial crisis. In Scotland, we are not hopeful that changes in the banking landscape will result in more positive outcomes for our small businesses. While some government initiatives have been helpful and the situation has clearly stabilised compared to the turn of the year, small businesses continue to face diYcult trading conditions and are not confident about their prospects. While businesses, and not government, will be responsible for a return to economic growth, further intervention will be required and it is now necessary to consider new ideas, particularly in improving SME access to finance and improving the relationship between banks and small businesses. Small businesses did not cause the banking crisis and it is vitally important to ensure that viable small businesses are able to gain access to credit on reasonable terms as quickly as possible, to allow them to sustain and create employment and move the economy from recession to recovery. 21 September 2009

Memorandum from the Building Societies Association Introduction 1. The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK, including all 52 UK building societies. Building societies (as at the end of July 2009) have total assets of over £370 billion and, together with their subsidiaries, hold residential mortgages of over £245 billion, more than 20% of the total outstanding in the UK. Societies hold nearly £240 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 36% of all cash ISA balances. Building societies employ approximately 50,000 full and part-time staV and operate through approximately 2,000 branches. 2. The three areas being covered by the Scottish AVairs Committee in its current inquiry are: (a) the eVect of the banking crisis on jobs, banking services to the public and small business lending in Scotland; (b) the eVect of the failure of Scottish banks and building societies on the international reputation of Scotland’s banking sector; and (c) the eVectiveness of measures put in place by the UK Government to tackle the impact of the banking crisis and to aid recovery in Scotland. 3. The BSA is a UK-wide body, with members in Scotland, England, Wales and Northern Ireland. It works from a single oYce in London. It views the banking market (broadly defined to include building societies) from a UK perspective and has no particular insights into the banking markets of England, Wales, Northern Ireland or, indeed, Scotland. The bulk of this evidence therefore covers the UK market, although references are made to the building society sector in Scotland. Accordingly,this evidence does not specifically answer the key questions posed by the Committee in a Scottish context. However, many of the points made in respect of the UK will have an impact on activity in Scotland in the same way as the other countries of the United Kingdom.

Building Societies—Background 4. Building societies are a specific form of mutual entity established under UK legislation. They are not companies. Societies’ legislation forces them to obtain the majority of their funding from the retail savings market, and to undertake the majority of their lending in the residential housing market. Building societies have no external shareholders; they are owned collectively by their mortgage and investing customers and have the advantage of not having to pay dividends. Generally, this enables them to pay higher, and charge lower, rates of interest on their savings and mortgage accounts than can their competitors. Their constitution also encourages them to concentrate on customer needs as this is the sole reason for their existence. A wide range of market research shows that building societies have a better record than their competitors in consistently paying good rates of interest; in achieving high customer satisfaction; and in customer perceptions of value for money, trust, treating customers fairly and willingness to recommend to friends and family. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Building Societies in Scotland 5. Until earlier this year, three building societies were based in Scotland. Their total assets at the end of 2007, the latest year for which information is available, were as follows.

Assets of Scottish-based Building Societies, end 2007 (£ million)

Dunfermline 3,303 Scottish 259 (31 January 2008) Century 22 6. By 31 January 2009 the assets of the Scottish Building Society had grown to £296 million, by 31 December 2008 the assets of the Century Building Society had reached £24 million. As is well known, the Dunfermline Building Society did not distribute an annual report on its financial position as at the end of 2008. This evidence does not dwell on circumstances leading to that situation. The Scottish AVairs Committee has already published a comprehensive report on the Dunfermline, following an inquiry earlier this year, to which the BSA contributed evidence. 7. Until the end of March this year, there had been three Scotland-based building societies for a number of years. The Dunfermline Building Society had merged with, at least, nine other Scottish building societies since 1945, the last of these (with the Edinburgh and Paisley Building Society) having occurred in May 1981. The Scottish Building Society had absorbed 10 other building societies since 1945; the last of these involved the transfer of engagements of the Huntly Building Society to the Scottish in November 1985. The Century Building Society has never been involved in merger activity. 8. Historically, the Scottish building society sector has been relatively smaller than that in the rest of the United Kingdom. This is likely to have been the result of: (a) A relatively strong trustee savings bank movement in Scotland. Indeed, the TSBs were founded initially in Scotland, the first being established in 1810. (b) The historically, relatively low level of owner-occupation in Scotland. In recent years the level of owner-occupation in Scotland has grown rapidly; however in the pre and post war period it was much lower than in the rest of the United Kingdom, thus leading to a relatively low demand for mortgages in Scotland. In other words, strong competition on the liability (savings) side of the balance sheet and a relative absence of demand on the asset (mortgage) side led to relatively low levels of building society activity in Scotland. Unlike in the banking sector, that activity that did take place was dominated by England-based building societies in the final decades of the 20th century. As at the end of 2008, we estimate that seven England-based societies operate in Scotland.

The Effectiveness of Measures put in place by the UK Government to Tackle the Impact of the Banking Crisis 9. We do not examine here the causes of the current crisis—these have already been well documented elsewhere. Once the current banking crisis had started it aVected a far wider range of institutions and countries than anyone had anticipated. Indeed, the crisis showed that institutions, markets and countries had become integrated to a previously unrecognised extent. 10. Moreover, the extent of market punishment of institutions had no respect for previous reputations. In the USA Fannie Mae and Freddie Mac, previously viewed as very solid, along with some of the greatest names in investment banking, failed to survive as independent entities. In the UK the Halifax required Government assistance, as did the Royal Bank of Scotland, believed during the earlier part of the decade to be an outstanding success story. Despite their relatively good performance, mutuals were by no means immune to the crisis. 11. Other features have included: — an unexpectedly strong link between declining share prices of institutions and depositor confidence in those institutions; — forced withdrawal of mortgage lenders from the market; — strong evidence of fraud; — a loss of trust and confidence both by institutions in each other, and retail depositors in institutions; and — a growth in mortgage arrears and repossessions. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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Government Assistance 12. In very brief summary, the main action on the part of the UK authorities—and others around the world have consisted of the provision of: — equity i.e. capital; — liquidity, including enhanced central bank activity; — guarantees; — low interest rates and quantitative easing; — enhanced deposit protection; — help for specific markets. In the UK in the housing market, the price threshold for paying transactions tax (Stamp Duty) was increased, while various initiatives were introduced to help those with mortgage arrears; — the maintenance of government spending (often involving increased levels of borrowing) at a time of reduced economic activity; and — new legislation, particularly in the UK, to facilitate the orderly run down of failed institutions.

The Impact of the Current Crisis on Building Societies and the Effectiveness of Government Assistance Measures 13. Like other institutions, building societies are finding current market conditions challenging: — very low interest rates have drastically reduced individuals’ incentive to save, restricted the flow of funds to the mortgage market; and squeezed building societies’ margins; — this has been exacerbated by the freezing of wholesale markets, from which the building society sector derives a significant minority of its funding; — requirements to finance a disproportionate share of the Financial Services Compensation Scheme liabilities arising from the bank failures of late 2008; — building societies (and banks) also suVer from conflicting pressures to increase capital, increase liquidity and to lend more; — societies face unfair competition from the range of fully nationalised and majority Government- owned banks; and — building society access to Government schemes, such as the Credit Guarantee Scheme and the Asset Protection Scheme is either not available to societies or available on much more onerous terms than for banks. 14. Building societies have performed relatively well during the recession. This is a view not only of societies themselves, but of both the FSA and HM Treasury. The FSA said in June 2009, for example, in A Specialist Sourcebook for Building Societies: Enhanced Supervisory Guidance on Financial and Credit Risk Management: Although building societies, like banks, have been weakened by adverse economic and financial market conditions, the extent of that weakening has to date been less than that experienced by the banks—mainly because of the lower exposure to wholesale funding and complex financial instruments. 15. Similarly, HM Treasury has expressed the view in its White Paper Reforming Financial Markets published in July 2009 that: The mutual sector has not been immune to the pressures caused by the contraction of global credit markets and the crisis that has ensued, particularly for those firms diversifying into new and high risk lending products—it is the Government’s view, however, that the traditional mutual model has, on the whole, stood up well. 16. Overall, building societies pursued less adventurous lending policies than their competitors in the mortgage market in the run up to 2007 and their arrears figures are significantly less, proportionately, than the average for the mortgage market as a whole (and building societies remain committed to helping those in arrears in every way they can, viewing repossession as the very last resort in the vast majority of arrears cases). 17. Despite this building societies, like other institutions, are finding current market conditions challenging. In particular, there is now a very limited flow of funds through the principal markets in which building societies operate. In 2006 deposit balances across all banks, building societies and National Savings and Investments rose by £77 billion. This year the figure is likely to be around £10 billion with all of this accounted for by interest credited to accounts—in other words, on a net basis, individuals are not putting new money into their cash savings; indeed, discretionary deposit saving is likely to be negative. The BSA warned earlier this year that very low interest rates would drastically reduce the incentive to save, and restrict the flow of funds to the mortgage market—unfortunately this prediction has proved to be correct. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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18. In the UK mortgage market in 2006 net advances (i.e. advances after taking account of repayments) amounted to £110 billion. This year, the figure is likely to be around zero. Quantitative easing, designed partly to increase the flow of funds in the economy, has not resulted in new flows in these markets. Indeed, the evidence suggests that banks are hoarding these flows, with substantial increases in their cash held with the Bank of England (up from £31 billion in March 2009 to £136 billion in August), rather than using QE money to increase their lending. 19. Profitability is also sharply diminished. In 2008 building societies collectively made a profit of 19 pence for every £100 which they managed. Over the previous few years the figure had been very stable at around 33 to 36 pence for every £100 of assets. The figures for 2008 were adversely aVected by reduced interest rate margins, lower sales of insurance products (reducing the flow of commission payments) some provisions for loss, and notably, provisions for payments into the Financial Services Compensation Scheme, as building societies bore a significant proportion of the costs of bailing out the failed Bradford and Bingley bank and the failed Icelandic banks. Similarly, the mainstream banking sector is also suVering a sharp reduction in profitability. Profits of the biggest four UK banks (HSBC, Barclays, Lloyds Banking Group and RBS) fell by 78% in their UK retail banking business between the first halves of 2008 and 2009. (Source: bank half yearly statements, analysed by KPMG in UK Banks: Performance Benchmarking Survey, Half Year 2009, page 15.) 20. Building societies (and banks) also suVer from conflicting pressures to increase capital, increase liquidity and to lend more (when funding markets are eVectively closed). These ambitions are not compatible. 21. In particular, building societies now have to place between 20% and 25% of the funds they raise in liquidity; (whereas in the prior two years the average liquidity ratio was less than 19%) similarly, banks have been required by the authorities to increase the proportion of liquid assets that they hold since the crisis began. This has the desirable objective of making banks and building societies more resilient to any future funding crises. However, those funds allocated to liquidity cannot simultaneously be lent to customers, be they homebuyers or businesses. 22. Similarly, banks and building societies are under pressure to hold increased levels of capital to cover the possibility that they might make further losses on the loans which they currently hold, or might hold in the future. Capital ratios can be increased, most obviously, by restricting the growth of the balance sheet and ensuring that any growth that does take place is concentrated on extremely low risk lending, which requires less of a capital buVer against the possibility of loss. This is achieved in the mortgage market, for example, by asking borrowers for large deposits and not lending to individuals with even the slightest blemish on their credit records. Falling house prices increase the potential losses that might be made in the event of repossession and again this trend again requires consideration of additional capital. Any institution considering ignoring these trends and increasing riskier lending faces the possibility of being downgraded by the credit-rating agencies, thus reducing the supply of wholesale funding further, increasing the cost of those funds that are available, and suVering a declining reputation in the retail market. 23. At the same time building societies face intense, and we believe, unfair competition from the range of fully nationalised or majority Government owned banks, together with National Savings and Investments, all of which are perceived to have explicitly or implicitly a total Government guarantee. Furthermore, the Government’s Debt Management OYce is replacing building societies (and banks) in the wholesale market. Local authorities especially used to lend significant sums to building societies (and banks) but have been withdrawing deposits from both sectors. 24. Access to Government schemes such as the Credit Guarantee Scheme (CGS) is either not available to building societies or is available on much restricted terms. The CGS can be used to obtain a Government guarantee only for issues of specific debt securities. But many building societies do not issue debt securities as their funding volumes do not justify the issue overheads—instead they take term deposits from the money market and provide a home for local authority temporary cash surpluses. The CGS would have been the ideal vehicle to provide, in the short term, the additional reassurance that local authorities needed, but because of its restrictive design features it could not be used and this has contributed to a large outflow from building societies of local authority deposits. 25. Where societies are able to access the CGS they are required to pay more than the banks. Nationwide Building Society, for example, has pointed out that it is required to pay 65% more than the Lloyds Bank Group pay to access the CGS and an estimated 35% more than Royal Bank of Scotland. All other societies that qualify for the CGS are required to pay even more than Nationwide. 26. Finally, it is important to bear in mind that all banks and building societies are diVerent; not all are aVected by the factors described above equally. The vast majority of building societies remain profitable, and will survive the current diYcult environment.

The Outlook 27. The outlook is one of slow recovery. The challenges described above are mostly not open to easy, quick solutions. Rather, a period of retrenchment, debt repayment and limited new borrowing is likely throughout the private elements of the economy. Steps are likely to be taken to reduce public sector borrowing. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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28. The current, very low levels of interest rates are bad news for savers and make life very diYcult for building societies. Whilst societies are doing all they can to help their savers, the oYcial Bank rate needs to be increased at the earliest opportunity. 29. Societies needing access to Government support schemes, such as the Credit Guarantee Scheme should be allowed this on terms similar to those of the banks. 30. The Government needs to ensure that nationalised and part-nationalised banks do not distort the retail markets for mortgages and savings to the detriment of competitor institutions. 31. As far as the regulatory authorities are concerned, a fairer mechanism for funding the FSCS needs to be found—at the moment prudent organisations (including most building societies) bear a disproportionate share of the costs of bailing out failed institutions and we look forward to the FSCS funding review that the FSA has promised for next year. In addition, a clear message from the authorities on their collective view on how to balance the conflicting pressures of liquidity, capital, and lending would be helpful. It will also be important to ensure that there is not too onerous a regulatory backlash that penalises the majority of well run institutions—the FSA is, for example, proposing a building society sourcebook that will restrict even the most prudently run societies in a way that will not be applied to banks. 32. Building societies, generally, are likely to tread water for a year or two in these conditions—their corporate structure, not involving the payment of dividends to shareholders, enables them to do this—in the expectation that they will be able to play an important role in the recovery in the housing market when this takes place in year or two’s time. Cost control has become even more important, and corporate governance standards need to be driven even higher. Nevertheless, building societies—and other financial mutuals—remain convinced that at a time of significant distrust of plc and nationalised banks, the mutual approach (despite recent diYculties) has much to commend it—both in Scotland and throughout the rest of the UK. 22 September 2009

Memorandum from the Scotland OYce 1. The Government welcomes the Scottish AVairs Committee’s inquiry into banking in Scotland. We are pleased to have the opportunity to highlight once again the significant actions that the UK Government has taken to support the Scottish banking sector and the Scottish economy by extension.

The Banking Sector in Scotland 2. The financial services sector in Scotland has proved to be an important contributor to the Scottish economy. The industry accounts for around eight percent of Scotland’s economic output, and directly supports around 91,000 jobs. The banking sector itself accounts for around half of the total contribution of the financial services sector to the Scottish economy. 3. More than half of the world’s top 20 financial organisations have established substantial operations in Scotland, and the industry also contains successful, global indigenous companies. Edinburgh is internationally recognised as the UK’s most important financial centre outside London. 4. Prior to the current financial crisis the Royal Bank of Scotland was the largest bank in the world, and HBOS was the UK’s largest mortgage lender. Together these two banks have more than 35,000 employees in Scotland. Lloyds TSB, then the UK’s fourth largest bank has just over 7,000 employees in Scotland.

Effect of the Banking Crisis in Scotland 5. The last two years has witnessed unprecedented turmoil in global financial markets: a financial crisis that is aVecting every country around the world. 6. Many forces came together to set the stage for the current crisis: — increasingly integrated global financial markets, with enormous amounts of capital flowing across borders every day; — improved monetary policy frameworks delivered low inflation and low interest rates, while the massive build-up of emerging markets’ foreign exchange reserves, invested mainly in US assets, pushed interest rates lower still; — low returns on conventional investments and the low cost of borrowing encouraged financial institutions to search for higher returns. Increasingly complex products were devised to repackage securities into new investment opportunities, and investors borrowed heavily from global capital markets to fund their investments; and — the bonus-driven pursuit of short-term profit in global financial institutions was compounded by shortcomings in financial regulation around the world, most obviously in the US sub-prime mortgage market. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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7. It is now clear that investors were over-paying for risky assets, demanding inadequate returns for the risks involved. A bubble had formed, with an apparent belief that repackaged assets in structured products could be worth more than the sum of their parts. In a highly leveraged, interconnected and complex global financial system, shocks like these are profoundly felt and quickly transmitted across countries. 8. Having paid too much for the assets, financial institutions had to revalue them, booking billions of dollars of losses in the process. This is how the collapse of the US sub-prime market became the catalyst for a global financial crisis. 9. HBOS had expanded at an inopportune moment in the financial markets and was particularly vulnerable to the freezing up of wholesale markets. It was clear by September 2008 that it would have been diYcult for HBOS to continue as an independent financial institution. The Boards of Lloyds TSB and HBOS agreed to a merger and the Government amended competition law to allow the financial stability implications of the merger to be considered alongside the eVect on competition.

Merger Process 10. The potential eVects of the merger between Lloyds TSB and HBOS, including the potential eVects on competition in Scotland, were assessed in detail in the OFT’s report to the Secretary of State for Business, Enterprise and Regulatory Reform (BERR). Since the Secretary of State (BERR) had issued a public interest intervention notice in respect of the proposed merger, the OFT’s report also included representations the OFT received on the public interest consideration specified in the intervention notice: the stability of the UK financial system. Among the representations made to the OFT on the public interest issues raised by this case were those from the Financial Services Authority, the Bank of England and HM Treasury.

The OFT’S findings on Competition Effects 11. As made clear at the time the OFT found there was a realistic prospect of the merger giving rise to a substantial lessening of competition in three areas: — the market for personal current accounts where at least until recently, HBOS had been a major driver of competition; — the market for banking services to SMEs in Scotland where the OFT had concerns about possible reduced competitive pressure on Lloyds; and — the market for mortgages where, although their concerns were less substantive, a cautious approach was warranted in view of the market’s importance. 12. The OFT set out clearly in its report at the time its reasons for believing that a strong, independent HBOS was not a realistic alternative scenario in the near term. 13. The OFT believed the most realistic alternative scenario to the merger between HBOS and Lloyds TSB proceeding was some form of Government rescue package for HBOS. In such circumstances, HBOS would have continued to exert some competitive pressure in the market, although the OFT recognised that HBOS was likely to be a weaker force than it was prior to the financial crisis. The OFT considered that, in the medium term, the Government would be likely to sell HBOS on to a new owner or owners: at which point its position as an eVective competitor in the market may have been expected to be restored.

Submissions made Concerning the Specified Public Interest Consideration 14. Together with the OFT’s assessment of the potential impact of the merger on competition, the Secretary of State (BERR) had to consider the relevant public interest consideration: the stability of the UK financial system. In considering this matter, the Secretary of State (BERR) had particular regard to the submissions made to the OFT by the tripartite authorities (the Financial Services Authority, the Bank of England and HM Treasury as the experts in assessing financial stability across the whole of the UK). These submissions contained assessments of the importance of HBOS to UK financial stability, the circumstances leading to the crisis at HBOS, the likely impact of a failure of HBOS, alternative ways of addressing the problems at HBOS and the impact the proposed merger might have in terms of securing financial stability. 15. From those submissions, it was clear the tripartite authorities had each concluded that the merger provided an eVective, market-based means of restoring the stability of HBOS and was likely to help secure the stability of the UK financial system as a whole and that it was the only available private sector means of securing this aim. The alternatives all involved greater risk of continued instability in the banking sector and financial markets and involved greater levels of direct government involvement and ownership. HM Treasury’s submission sought to summarise the views of the tripartite authorities as follows: In the view of the Tripartite Authorities the merger remains the best option in terms of financial stability. The Bank of England’s evidence recommends that the takeover should proceed without delay. The evidence from the Financial Services Authority concludes that the merger aVords a means to maintain financial stability and to sustain confidence of HBOS creditors. The merged recapitalised entity will be on a strong footing to withstand further turbulence in the financial markets. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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We agree with the Bank of England’s assessment that the merged entity would be stronger than a standalone HBOS. The benefits of the merger for financial stability include: — improved confidence; — improved business model; — better capital base; — reduced reliance on wholesale funding; — improved credit rating; — broader business base; and — addressing funding issues. 16. HM Treasury also concluded that the merger would lead to improved confidence, an improved business model for HBOS with reduced reliance on wholesale funding and less exposure to the mortgage market, a broader business base, an improved credit rating and a better quality asset base than a standalone HBOS. They pointed out that the recapitalisation of both banks which was to accompany the merger would make a significant contribution to improving the capital base of the merged entity.

The Secretary of State’s (BERR) Decision 17. On balance, the Secretary of State (BERR) decided not to refer the merger to the Competition Commission on the basis that it would be beneficial to the stability of the UK financial system and that the public interest consideration of financial stability justified the potential for the merger to result in the anti- competitive outcomes the OFT identified. The full text of the Secretary of State’s (BERR) decision and summary of reasons can be found on the BERR website (http://www.berr.gov.uk/whatwedo/businesslaw/ competition/mergers/public-interest/financial-stability/index.html). The Secretary of State’s (BERR) statement in Parliament on the matter is available from Hansard (http://www.publications.parliament.uk/ pa/ld200708/ldhansrd/text/81016-0005.htm<08101659000012). 18. The Secretary of State’s (BERR) decision was subject to a legal challenge brought by a group of Scottish business-men called the Merger Action Group. The judgement in that case, handed down on 10 December, can be found on the Competition Appeals Tribunal website along with copies of the written submissions of the parties and transcripts of the oral hearings (http://www.catribunal.org.uk/237-3402/1107- 4-10-08-Merger-Action-Group.html). 19. The OFT will continue to monitor the banking sector carefully.

Managing Government’s Investments 20. The Government’s investments are managed on a commercial basis by an arm’s length company, “UK Financial Investments Limited” (UKFI), wholly owned by the Government. Its overarching objective is to protect and create value for the taxpayer as shareholder with due regard to the maintenance of financial stability and to act in a way that promotes competition. This includes: — maximising sustainable value for the taxpayer, taking account of risk; — maintaining financial stability by having due regard to the impact of its value realization decisions; and — promoting competition in a way that is consistent with a UK financial services industry that operates to the benefit of consumers and respects the commercial decisions of the financial institutions. 21. As made clear at the time, the Government does not intend to be a permanent investor in UK financial institutions and so UKFI are responsible for developing a strategy for the disposal of the investments in an orderly way, through sale, redemption, buy-back or other means in accordance, in line with the objective set out above. 22. Consistent with the agreements reached with the companies which subscribed to the recapitalization fund, UKFI is also responsible for working with the Boards to strengthen their membership through the appointment of suitably qualified, independent non-executives. Final decisions will be taken by the relevant company Boards. 23. UKFI also oversees the non-lending conditions attached to subscribing to the Government’s recapitalization fund, including conditions around remuneration for Board directors where UKFI are working to ensure remuneration is linked to long-term value creation, and that there can be no reward for failure. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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24. The UKFI Board comprises a Chair, three non-executive members, a Chief Executive and two senior Government oYcials from HM Treasury and the Shareholder Executive. Glen Moreno is UKFI’s acting Chair and John Kingman holds the position of Chief Executive. The full list of board members can be found on the UKFI website (http://www.ukfi.gov.uk/about-us/).

25. The UKFI Board is accountable to the Government, and through the Chancellor, to Parliament for the delivery of its objectives. Annual reports on UKFI’s performance will be laid before Parliament and the Chair and Chief Executive will be available to scrutiny by the relevant Parliamentary Committees.

Supporting Borrowers 26. The Government is continuing to take action to ensure competitively priced mortgages continue to be available.

27. In the 2008 Pre-Budget Report, the Government announced the creation of a new Lending Panel bringing together government, lenders, trade bodies, regulators, and consumer groups to monitor lending to businesses and households. As part of this new monitoring approach, the Bank of England is publishing a monthly report—Trends in Lending—the first of which was published on 21 April 2009.

28. On 19 January, the Government announced a package of measures designed to reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy.

29. The Government has agreed specific and legally binding lending commitments with Lloyds Banking Group and the Royal Bank of Scotland Group. Lloyds will lend an additional £3 billion of mortgage lending and £11 billion of business lending on commercial terms over the 12 months from March 2009. RBS will lend an additional £9 billion of mortgage lending and £16 billion of business lending on commercial terms over the 12 months from March 2009.

Banker’s Pay 30. The Government agrees that remuneration policies were a contributory factor in the current market disruption. StaV in certain areas of banking were incentivised to pursue overly risky practices, which although profitable in the short term, did not take appropriate account of risk over the long term. That many of these longer term risks are diYcult to quantify cannot justify them being understated by senior management. The Government is therefore clear that the banking industry, both in the UK and globally, must put in place remuneration policies which take proper account of risk.

31. On 12 August the FSA published its Code of Practice on Remuneration Practices which deals with the governance or remuneration, the performance metrics used for calculating bonuses and remuneration structures for senior management and for those who take significant risks on behalf of a firm. The Code will come into force on 1 January 2010 and the FSA will be able to require firms to hold additional capital if it feels their remuneration policies are inconsistent with the Code and encourage excessive risk taking.

32. The Chancellor has, furthermore, asked the FSA to provide an annual report on remuneration practices, including compliance by firms with the new Code. This report will assess whether remuneration practices are likely to lead to a build up of systemic risk, and make recommendations for action if this is thought to be the case.

33. In parallel Sir David Walker has been appointed by the Government to carry out a detailed review of corporate governance of banks and other financial institutions. On 16 July he published a consultation paper, which among other things, contains proposals to strengthen remuneration practices as part of improvements to corporate governance. Sir David’s consultation invites comments by 1 October and he will deliver his final report and recommendations to the Government in November.

34. The UK has also played a leading role in developing an international approach. The FSA was a key player in the preparation of the Financial Stability Board’s (FSB’s) Principles for Sound Compensation Practices report that G20 Leaders agreed at the London Summit to endorse and implement. The FSB’s principles state that there should be: eVective governance of compensation; eVective alignment of compensation with prudent risk taking; and, eVective supervisory oversight and engagement by stakeholders. The FSB report stated that these principles will be implemented by firms and supported by work at the national level, as the FSA is doing in the UK.

35. The banks in which the Government is a shareholder are being managed on a commercial and arm’s length basis by UK Financial Investments Ltd (UKFI), which is wholly owned by the Government. UKFI is working with the banks as a shareholder to ensure they oVer incentives based on the Government’s remuneration principles and to protect the interest of the taxpayer. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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Summary 36. The banking sector makes an important contribution to the Scottish economy. The Government has acted decisively to protect people’s savings, get the banking system working again, clean it up, and rebuild it for the future so that it can support people and businesses across the country. 37. The Government has acted in a manner that protects taxpayer interests and will ensure sound public finances over the medium-term. Failure to act would have meant far greater risks to the economy and public finances in future. 2 October 2009

Memorandum from the Royal Bank of Scotland Group Introduction The crisis was felt very acutely in Scotland where the pre-eminence of the sector and the large banks have been the source of so much pride for so long. At RBS, responsibility for our mistakes and our part in the crisis has been allocated and accepted. Apologies have been given and the relevant leaders have left the business. We now have a new management team in place, overseen by a new Board. As part of the recapitalisation RBS agreed to appoint three new non-executive directors, all of which have now been appointed. The vast majority of our people should carry none of the blame for our problems. Our staV across Scotland have met the crisis, and all it has meant for their professional and personal lives, with a resolution to keep serving their customers to the best of their ability. All our staV, from the Board to our branches and call centres, remain committed to restoring the bank to strength. Our ambition is to become a new and very diVerent bank rather than returning to the bank we were before the crisis. To achieve this we are changing the business we do and the way we do it and at the end we believe the Government will be able to sell their shares at a profit. We recognise we are in a privileged position to have the support of the taxpayer behind us and in time hope to justify that support. We realise that we only enjoy that support because of the central position we occupy in society and in the economy. With that support and position come responsibilities, large and small, that we must and will fulfil. In February we announced details of the Strategic Plan for restructuring the bank. It is the most substantial plan of its kind to turnaround a business. The plan will remake RBS as one of the world’s most admired, valuable and stable universal banks powered by market-leading businesses in large customer- driven markets. We will target a sustainable 15% plus return on equity with an AA category risk profile and well capitalised balance sheet. The business mix should produce an attractive blend of profitability, stability and sustainable growth. Anchored in the UK and in retail and commercial banking, we will retain strong but more focused global capabilities in the areas required to serve our customers well. To deliver this goal, we have a clear strategy and performance targets based around three core elements: — Financial restructuring, to radically restructure and reduce the size of our balance sheet. This will be principally managed through the creation of a Non-Core division which will manage the run down or sale of assets, now valued at over £200 billion for a total reduction exceeding £500 billion; — Core business restructuring, where our focus is on strengthening the businesses we will keep through major eYciency improvements and renewed investment; and — Cross-cutting management and cultural change, placing an emphasis on long term strategic thinking, empowerment and accountability of our people and a fundamental change to how we view risk, based on a realisation that our customers financial health and our own are interdependent. We owe it to everyone: customers; shareholders; staV; and the wider public, to repay the support we have been privileged to receive. We believe this plan will help us achieve that and will be open and transparent about our progress, reporting quarterly about how we are delivering against the strategy and targets. We believe the foundations are already there in some very strong businesses staVed by talented and committed people with deep customer relationships. Our Headquarters have been in Edinburgh for over 280 years and we are firmly rooted here. We have an extensive footprint in Scotland with circa 1.6 million retail customers in over 300 branches, more than 600 free-to-use ATMs, 14 mobile banks and one flying bank serving 300 remote and rural Scottish communities. RBS is the number one small business bank in Scotland and is also banker to many larger Scottish companies. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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We actively support the local community in Scotland. In 2009, 302 schools have so far actively participated in our financial education programmes, MoneySense for schools, and over 39,000 pupils have received a MoneySense lesson from one of our staV. There are 170 MoneySense advisers in branches in Scotland who are trained by the Consumer Credit Counselling Service to provide impartial guidance and money management tips.

1. The Effect of the Banking Crisis on Jobs,Banking Services to the Public and Small Business Lending in Scotland 1.1 RBS has an extensive footprint in Scotland and is committed to keeping the Group’s headquarters in Scotland. At a recent Scottish Financial Enterprise (SFE) event, RBS Chief Executive, Stephen Hester, said: “Our roots will remain anchored where they have always been, here in Scotland. This is an outstanding location in which to do business”. 1.2 At RBS our restructuring programme mentioned above aVects every business we have in every location, including Scotland. Our Global Banking and Markets business (GBM) was most aVected by the credit markets crisis and therefore bore the brunt of early job cuts as segments of our business closed. Very few staV from GBM are or were located in Scotland meaning that these initial job impacts were not felt in Scotland. The rest of the cost reduction programme is, inevitably, aVecting Scotland given the concentration of businesses we have here. However, so far Scotland has been relatively less aVected by job losses than other areas and we expect this to continue to be the case due to the mix of employment. Although we fully understand that this will oVer little comfort to those who have been aVected. 1.3 We have announced job losses for each business area as soon as that information becomes available, beginning the consultation with our staV’s representative bodies, principally Unite, and then telling our staV. We want to make sure our staV are the first to know about any plans which aVect them. Although we can do nothing about the need to reduce the number of employees as we reduce our operating costs, we have sought to manage the process of this to the highest standards of transparency and sensitivity. 1.4 Since October 2008, RBS has identified around 800 roles in Scotland which are no longer required, out of the 16,500 jobs that currently exist. These job reductions have not all been progressed yet, and it is impossible to say how many staV may be redeployed into alternative roles, thus reducing numbers of redundancies. So far, only one in four of those who have left the business have lost their jobs through compulsory redundancy and we are committed to doing all we can to mitigate job losses wherever possible.

Banking services 1.5 As part of the recapitalisation by the UK Government, RBS committed to make an additional £25 billionn of lending available to meet creditworthy demand from households and businesses in the UK. This funding was split between £9 billion on mortgages, and £16 billion on lending to small, medium and large businesses. 1.6 We are very much open for business and ready, willing and able to meet these commitments for both mortgages and business lending. While we are fulfilling our commitment to make these sums available, we are facing an economy-wide fall in demand. This is both natural and welcome as the country moves to address its over-indebtedness and plots a sustainable path back to economic growth. 1.7 One of the fundamental changes in the wider economic environment is a shift in power from borrowers to savers following the end of the credit boom. This means banks’ borrowing costs are often much higher than reference rates like the Bank of England Base Rate. To illustrate this, while the base rate is 0.5% we recently borrowed, £1.2 billion over five years on commercial terms at a rate of 4.9%. We need to recoup our own cost of borrowing from our lending. 1.8 Borrowers have naturally found this a diYcult transition and it is understandably a subject of much discussion and concern. But as our first half results make clear, we are making less profit from our core banking business than before, not more, and currently not enough to return to stable and sustainable banking.

Business lending 1.9 Through our Regional SME Funds initiative we have made an extra £3 billion available to SMEs, including a £250 million fund for Scotland. Our new lending to SMEs in Scotland has surpassed £1 billion since the beginning of the year and our total outstanding lending is currently up 3.6% over this period. 1.10 Our approval rates remain stable, we are approving 85% of all applications for SME lending we receive which is the same as it was before the financial crisis. Obviously the 15% is still a very large number given the scale of RBS and these people are naturally disappointed. 1.11 Demand for credit is falling. In the first half of 2009, borrowing requests by SME customers had declined by 37%. In the first half 2009, we provided £28.6 billion in new loans to UK businesses while our business customers also repaid over £35 billion. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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1.12 Larger companies are also actively reducing their debt through capital restructuring exercises. At RBS we have played a leading role in facilitating capital market issuance for larger companies, helping them raise a total of £65 billion in the first half of 2009, more than double the sum raised in the same period in 2007. 1.13 In November 2008, we gave a promise not to increase small business customers’ overdraft pricing until the end of 2009 unless the risks associated with lending to them have increased. As a result in the last quarter, Q2 2009, 94% of SME customers had overdrafts renewed at the same margin or lower. The following month we launched a dedicated helpline for small businesses struggling with the recession. We continue to support the national Business Debtline, operated by the Money Advice Trust. 1.14 Since the launch of the Enterprise Finance Guarantee (EFG) by the Government in January 2009, we have also been able to lend to small businesses which may not have been able to access funding before. 1.15 We currently have £228 million of EFG loans already agreed or in the pipeline and are committed to ensuring that, like its predecessor the Small Firms Loan Guarantee Scheme, the EFG is widely accessible to our small and medium sized business customers. We make sure that our Relationship Managers are able to identify opportunities where EFG can improve the availability of working capital or support lending for business growth. RBS Group is the largest supporter of the EFG Scheme and now accounts for 42% of all EFG funds drawn down, worth £165 million. In Scotland, RBS accounts for £24.5 million of £35.8 million drawn under the scheme. 1.16 We have oVered loans totalling £192 million to over 1600 businesses under the Enterprise Finance Guarantee Scheme. This represents 37% of the total loans oVered by all banks under the scheme.

Mortgages 1.17 We have lent over £7 billion in new mortgages across the UK and have had £3 billion repaid in the first half of 2009. This is a net increase in lending of £4 billion. 1.18 In March we announced that £1.7 billion worth of new mortgage lending will be made available in Scotland alone during 2009. To the end of July, we had lent £855 million and are on track to achieve the £1.7 billion by the year-end. We anticipate a similar sum will be pledged to the Scottish market in 2010 and will meet further demand if it proves higher than our commitment. 1.19 We recognise the importance of first time buyers to the housing market and are actively lending to them. We have committed to maintaining a competitive range of mortgage products which oVer loans of up to 90% of the property value. Furthermore we have supported the UK and Scottish Governments’ shared equity schemes which help buyers who would not otherwise be able to purchase a property on the open market. 1.20 Last December we pledged not to initiate repossession proceedings for a full six months after a customer first falls into arrears to help customers who may be struggling to keep up their mortgage repayments through the recession. This is double the amount of time recommended by the Government but we felt it was important to give our customers some breathing space should they encounter financial hardship. No other high street lender has pledged to do the same, so far. 1.21 As a longstanding supporter of the free money advice sector we know that it is important that customers in financial hardship are given the opportunity to seek advice from independent money advice organisations before any steps are taken. That’s why we’ve given customers who are struggling with unsecured personal loans and overdrafts a 30 day breathing space to seek help and establish a debt repayment plan, if that’s appropriate for them.

2. The Effect of the failure of Scottish Banks and Building Societies on the International Reputation of Scotland’s Banking Sector 2.1 The economic roots of the banking crisis has lay in a long era of easy money. Following the dramatic reduction in interest rates in the US and other economies post 2000, credit for people, companies, governments and banks was easy to come by and became too cheap relative to the risks and so human behaviour erred, at all levels. Economics tell us that in the US, UK and parts of Europe we need to save more and consume less, while in Asia the rebalancing needed is to consume a bit more and save a bit less. 2.2 In addition, innovations in the financial services industry were believed to disperse and reduce risk but their complexity was not well understood and in fact served only to increase the risk across the system. 2.3 Banks across the world incurred very large losses which, along with the market fear about future potential losses, led to a contraction in credit and liquidity and consequently a very severe global recession. The organisations aVected most severely vary considerably in size and complexity with all diVerent types of banks and building societies impacted. 2.4 Financial services companies in Scotland, including RBS, have been aVected by these developments. However, there is nothing inherently Scottish in the diYculties that each company has faced. The financial sector in Scotland has been aVected by the recent diYculties in ways similar to other countries. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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2.5 RBS and many other banks have sustained very significant damage to both our businesses and our reputations. We recognise our part in the crisis and those responsible have left the business. We are now focused on the job in hand to return the bank to standalone strength which will enable the UK Government to sell its shares, we hope at a profit. The lessons of the crisis have been learned and both the business we do and the way we do it are being changed, fundamentally.

3. The Effectiveness of Measures put in place by the UK Government to Tackle the Impact of the Banking Crisis and to Aid Recovery in Scotland 3.1 As part of the recapitalisation by the Government, RBS was able to commit to making an additional £25 billion of lending available to creditworthy households and businesses across the UK. 3.2 We have actively participated in the Enterprise Finance Guarantee (EFG) launched by the Government in January 2009 to lend to more small businesses. 3.3 We believe that EFG has been a very important scheme providing cash flow support to SMEs. It is working well and it has enabled us to provide finance to businesses that otherwise would not have been supported. We are committed to ensuring that the EFG is widely accessible to our SME customers and that our Relationship Managers are able to identify opportunities where EFG can improve the availability of working capital or support lending for business growth. 3.4 To date we have led the field in taking applications for the EFG scheme, with over £240 million worth of loans already agreed or in the pipeline. Recent BIS figures also confirm that of all EFG lending across the industry, NatWest and RBS have provided 42% of all loans drawn down. 3.5 We actively support and make referrals to the various government schemes for struggling homeowners: Support for Mortgage Interest, Homeowner Mortgage Support and Mortgage Rescue. 3.6 Prior to the financial crisis, the only nationwide government scheme available to struggling homeowners was Support for Mortgage Interest (SMI). This scheme had limited eVectiveness as it applied only to mortgages up to the value of £100,000 and after 39 weeks of unemployment. For most consumers, this time delay was too long to protect their homes from repossession. 3.7 We welcome the changes that were made to this scheme at the start of the year, namely a reduction in the period for which homeowners have to wait to be paid from 39 weeks to 13 weeks, and an increase to £200,000 in the maximum size of mortgages eligible for the scheme. Where a recently unemployed customer meets eligibility criteria and has applied for SMI, we will grant a minimum three month repayment holiday to support them. 3.8 The Homeowner Mortgage Support and Mortgage Rescue schemes are intended for cases where a lender has exhausted all possible forbearance techniques. As RBS have a range of options to help homeowners experiencing repayment diYculties, always treat repossession as a last resort, and the proportion of our mortgage customers in arrears is lower than average, there are a limited number of customers we can apply these schemes to. 14 October 2009

Memorandum from Citizens Advice Scotland Summary — The eVects of the banking crisis and associated diYculties in the subsequent recession have had a significant impact on the Scottish economy and citizens advice bureau clients. — Much of the negative impact on our clients stems from poor banking policy and practices that existed before the crisis, many of which remain in place today and continue to aVect clients. — As the recession hits jobs and incomes, increasing numbers of people are experiencing detriment due to poor banking practices. — Banks are becoming more aggressive in chasing debts and less sympathetic to customers experiencing financial diYculties. — The UK Government’s measures to deal with the impact of the banking crisis have been more successful at maintaining “business as usual” for banks, but less successful at addressing the needs of vulnerable consumers aVected by the crisis.

Introduction Citizens Advice Scotland (CAS) is the umbrella organisation for Scotland’s network of 83 Citizens Advice Bureau (CAB) oYces. These bureaux deliver frontline advice services throughout 222 service points across the country, from the city centres of Glasgow and Edinburgh to the Highlands, Islands and rural Borders communities. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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In 2008–09, 360,836 debt issues were dealt with by Scottish bureaux—a 14% increase on the previous year. This represents nearly 1,000 debt issues dealt with by Scottish bureaux every day of the year. Consumer debt remains by far the most common single issue that clients bring to bureaux. Many of these debt issues relate to the UK banks, who are one of the main types of creditor used by bureau clients. Our Drowning in Debt report (2009) showed that banks were the creditors for almost half of the debts held by bureau debt clients, and that almost nine out of every 10 debt clients are in debt to their bank. Banks play an important role for the vast majority of adults in the UK. They are the gateway to mainstream financial services, the provider of current and savings accounts, and the main source of much needed credit. Banks provide mortgages to buy homes, capital for businesses, and are a necessity for anyone who gets wages for employment. Because of this important role that the banks have in UK society, the repercussions of poor policies and practices have a wide and sometimes severe impact on our clients. The eVects of the credit crunch and associated diYculties in the subsequent recession have had a significant impact on the Scottish economy and on Scottish CAB clients. While some of the eVects were unprecedented and diYcult to have foreseen, much of the negative impact stems from poor banking policy and practices, many of which remain in place today and continue to aVect CAB clients. The Credit Crunch, and the subsequent troubles of both HBOS and RBS, has undoubtedly aVected the reputation of the sector, but from a CAB perspective, confidence and trust in banks has been eroded over a period of years. This briefing looks at the contribution of banking policy to the ongoing diYculties in the sector arguing that a return to “business as usual” isn’t acceptable for Scottish CAB clients

The Effect of the Banking Crisis on Banking Services to the Public The impact of the financial crisis has been very obvious in some cases—the HBOS merger and the near demise of RBS—but in other ways it has been less tangible. Many of our clients have found to their detriment that banks are more diYcult to deal with, with credit and mortgages more diYcult to access, banks taking a harder line on those in arrears, and showing an unsympathetic attitude to customers suVering financial diYculty. However, most of these problems weren’t directly caused by the financial crisis, but were in fact pre- existing problems that have been made worse by the crisis. Many of the current problems for our clients are caused by policies that were causing detriment prior to the recession, and which are becoming more obvious now as jobs are lost, incomes fall, and debt rises. For example, the issue of unfair overdraft charges is still ongoing, and promises to drag on through the courts for some months. In the mean time, citizens advice bureaux are reporting increasing numbers of clients who find themselves facing disproportionate charges. Many of these clients are victims of the recession who had never gone into their overdraft previously and had little experience of the extortionate charges that they now face. While the recession may have pushed clients into their overdrafts, it is the pre- crisis policies of banks that unfairly keep them there. A South of Scotland CAB reports of a client who accumulated over £1,000 in bank charges over a three month period while his bank refused his application for an approved overdraft limit. The client is overdrawn by £270 and wanted an overdraft facility so that he can pay oV the money that he owes without being stung by multiple charges. The bureau contacted the bank and managed to negotiate a £500 overdraft facility for the client. An East of Scotland CAB reports of a single mother who is in serious financial diYculties due to disproportionate and unfair bank charges. The client is being charged £5 by her bank for every day she is overdrawn and £25 for every transaction she makes. The client is living on Income Support with a five year old daughter. A West of Scotland CAB reports of a client who incurred an overdraft of 70 pence after a company failed to cancel a Direct Debit as requested. Consequently she has incurred overdraft charges of £176 to date with £20 being added per day. Those who have credit or debt from their banks are finding life more diYcult in the financial crisis. Bureaux have reported anecdotally that banks are more aggressive in their behaviour and actions towards those who owe them money,and that they are often unsympathetic to customers in financial diYculties. This can include behaviour that amounts to harassment in their communication with clients. A West of Scotland CAB reports of a client who received phone calls at all hours from his bank after falling into arrears. The client received calls into the evening and from 8am. His wife often took the calls and sometimes they were “silent”, but the client was sure they were from the bank. The bureau wrote to the bank complaining on behalf of the client. The reply stated that all customers who get into arrears receive phone calls like this, but the system is unable to cope with requests not to call at certain hours. Some calls start out as silent as the operator can’t always respond immediately. These administration diYculties at the bank cause unfair stress and worry for clients. A North of Scotland CAB reports of a client who is being harassed by her bank by way of frequent messages to her phone. The bureau is attempting to act on the behalf of the client, but the bank refuses or is reluctant to negotiate with the bureau, and is continuing to target the client directly. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Another way in which a bank can put pressure on clients to repay is to encourage them to take out further products as part of their repayment. Once this oVer is in place, it can be diYcult for the client to reject the product and negotiate with the creditor, with evidence showing that banks can threaten to withdraw banking facilities if the client does not take the oVer. The types of related products that clients can be under pressure to agree to include further loans, consolidation loans, credit cards, and overdrafts. A West of Scotland CAB reports of a client who made a repayment oVer to her creditors, and was instead oVered a further loan. The loan would have helped the client to avoid default, but would have cost a further £2,700 in interest and charges. The client rejected the oVer, and decided to stick to the repayment plan prepared by the bureau. A South of Scotland CAB reports of a client with learning diYculties whose bank is insisting on a consolidation loan rather than repayments to creditors. The client was accompanied by a friend to set up direct debits to his creditors for token oVers, but on both occasions in which he tried to do this, the financial adviser at the bank (to whom the client does not owe money) told the client with some persistence that he should forget about token oVers and the bank would give him a £5,000 consolidation loan (the client’s debt was only £1,700). The client’s friend told the bank he would get a power of attorney for our client so that he could prevent the bank persuading the client to take out the loan. Scottish bureaux are also reporting that banks are insisting on much higher repayments from clients in order to repay the debt quicker. Many clients are already at the edge of what they can aVord to repay. If they attempt to make the higher payments they risk going without essentials or missing priority payments. However, failure to make the higher payments would in turn result in default charges and high interest rates, making the debt much more diYcult to repay. This leaves the client with a diYcult choice to make. A North of Scotland CAB reports of a lone parent whose bank are insisting that she increases her repayments on her overdraft to over four times the level she is currently paying. The client has an agreement to pay £66 per month, but now her bank is insisting on the overdraft being cleared in six months which would entail payments of over £300 which the client cannot aVord. Another problem that has emerged in the financial crisis is the increased use of the “right of set oV’. The right of set oV allows banks to legally transfer cash from current or savings accounts to pay credit card or loan arrears without account holders’ permission. Citizens Advice Bureaux have seen cases of people having their pay or benefit payments removed from accounts, leaving them unable to meet priority debts, such as mortgage payments and council tax, and in greater financial diYculty. A North of Scotland CAB reports of a lone parent whose bank took £400 from her account to repay debts without her permission. The client has credit card and overdraft debts with her bank, with whom the bureau has been in contact with to negotiate repayments. The bank took £400 from her current account after her wages had been paid in, leaving the client with no money at all. The client contacted her branch who stated that if the client moved her account to another bank they would take her to court. An East of Scotland CAB reports of a client whose bank used their “right of set oV” to take the client’s wages to go towards arrears on a loan. The client is working 10 hours per week and is receiving £11 per week in benefits. Upon being paid this month, the bank took all the funds towards repaying arrears on his loan, leaving the client with no funds. One of the hallmarks of the pre-Credit Crunch period of prosperity was easy access to credit. However, bureaux evidence has shown that this often led to irresponsible lending, where inappropriate amounts of credit were oVered to low income consumers under unaVordable agreements. While irresponsible lending still occurs, it is now a concern that banks may be cutting back on the availability of credit for consumers. In particular, we have seen clients who have found that they suddenly don’t meet a bank’s lending criteria having done so previously.There is evidence to suggest that lending criteria is shifting upwards, leaving those less well oV without access to what is increasingly a necessity in today’s economy. A West of Scotland CAB reports of a client who had an oVer of a mortgage withdrawn at the last moment by his bank. The client was oVered a mortgage, and on the strength of this has sold his house. His bank has now withdrawn the oVer, stating that the client and his wife no longer meet their lending criteria. The client’s circumstances have not changed, suggesting that the bank has shifted their lending criteria away from the client. If banks reduce their supply of credit in the market, it does not automatically mean that demand for credit from consumers will reduce. In today’s economy, access to aVordable credit is a necessity for most consumers, and a lack of supply from mainstream lenders will mean that consumers will turn to other sources of (often unaVordable) credit. There is evidence to suggest that without a source of aVordable mainstream credit, consumers are turning to more high cost forms of credit. An East of Scotland CAB reports of a client who intended to borrow £1,500 from a log book loan company at a rate of over 400%. The agreement required the client to hand over her car log book and a car key prior to obtaining the loan. The bureau explained to the client that the interest was very high on the loan and the client could lose her car. The client would have repaid £4,100 over 78 weeks for a loan of £1,500. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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This type of case shows how important it is that access to aVordable credit from mainstream lenders is open to those on lower incomes. The alternative for consumers is to seek higher cost and higher risk sources of credit. Simply to go without credit may not be an option.

The Effectiveness of Measures put in Place by the UK Government to Tackle the Impact of the Banking Crisis and to Aid Recovery in Scotland The solutions put forward to solve the financial crisis have mainly focused on introducing stability and liquidity into the existing system, as well as attempting to reduce risk taking in the sector. The customer- focused solutions introduced by the UK Government, such as the Homeowner Mortgage Support Scheme, have had a moderate impact on the tide of repossessions, with banks reportedly showing greater forbearance before bringing their customers through the repossession process. Plans to curb the worst excesses of the credit card and Payment Protection Insurance (PPI) industries are also welcome, although the benefits expected from these plans are yet to be felt by our clients. However, while the UK Government has spent much eVort dealing with the banking crisis, we consider that few of the solutions appear to have given any great consideration to the needs of customers who are suVering most from the eVects of the crisis (and, indeed, were suVering from poor practice prior to the crisis). This return to “business as usual” for the banks will not address the endemic problems that customers often have to face with their banks. We consider that any solution to the crisis requires looking at the needs of the high street customer and particularly low income and vulnerable consumers.

Conclusion The banking crisis has had a severe impact on Scottish Citizens Advice Bureaux and the clients that approach them for advice. Bureau advisers are dealing with a hugely increased workload, with many clients experiencing complex and diYcult issues. Every single CAB in Scotland is stretched to capacity trying to deal with the excess workload. The government recognised this pressure this year and provided an emergency funding package, which we were able to funnel straight into front-line local services. However, the eVects of the banking crisis will go on for some time after this funding ends in March, and it must be ensured that Bureaux will be equipped to carry on dealing with the needs of their clients.

The eVects of the banking crisis for our clients are in many ways an amplification of the eVects that were being felt before the crisis. Unfair banking charges, irresponsible lending, unsympathetic attitudes to those experiencing financial diYculties and aggressive debt collection were all hallmarks of the pre-crisis UK. The eVect of the banking crisis has been to worsen these problems for clients, and at the same time to introduce many more people to these poor practices. Any remedy for the banking crisis needs to address these problems and give greater consideration to low income and vulnerable consumers, who are the real losers in the crisis. Citizens Advice Scotland November 2009

Further memorandum from the Law Society of Scotland Introduction The Law Society of Scotland welcomes the opportunity to submit evidence to the Scottish AVairs Committee in connection with the eVect of the banking crisis on jobs, banking services to the public and small business lending in Scotland.

Statistical Update 1. Registers of Scotland The most recent data from Registers of Scotland (and other indicators) suggest that the property market is at the bottom of the curve. Average house prices and total sale values and volumes in the 3rd Quarter of the year were all still down year-on-year, but the rate of decline has greatly reduced since the previous quarter.

Volume of property sales The volume of sales transactions in Scotland during the third quarter of 2009 (July–September) was 20,095, representing an increase of 23.8% on the second quarter but a decrease of 19.8% compared to the same quarter last year. The rate of year-on-year decline is easing, as the comparative decrease for the second quarter was 47.8%. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Value of property sales The total value of sales across Scotland registered during the third quarter was just over £3.1 billion, up 31.45% from the second quarter but down 22.6% from the third quarter last year. Again the rate of decline is slowing, as the second quarter total was down 51.2% year-on-year.

Average house price The average house price for Scotland over the third quarter was £154,453, up from £145,553 in the second quarter. This represents a quarterly increase of 6.1%, but a decrease of 3.6% when compared with the same period in 2008. However once more the rate of year-on-year decline is slowing down, as the comparative decrease for the second quarter was 6.5%.

2. Accountant in Bankruptcy The most recent data from the Accountant in Bankruptcy in Scotland also suggest that we are through the worst. The number of personal insolvencies in the 3rd Quarter of the year was down year-on year. The number of debt arrangement schemes was sharply up year-on-year, but the rate of increase was much lower than in the previous quarter.

Personal Insolvencies There were 5,767 personal insolvencies in Scotland in the second quarter of 2009–10 (July–September). This figure represents a decrease of 8% on the previous quarter and a decrease of 4% on the second quarter of 2008.This contrasts with a 33% year-on-year increase in the first quarter. In total there were 3,504 awards of bankruptcy, a decrease of 6% on the previous quarter and a decrease of 14% on the same period last year. Again this contrasts with a 31% year-on-year increase in the first quarter. The number of Protected Trust Deeds recorded was 2,263 in total, a decrease of 12% on the previous quarter but an increase of 16% on the corresponding quarter of 2008. However the rate of increase is slowing, as the previous quarter showed an increase of 36% year-on-year.

Debtor Applications The Accountant in Bankruptcy received 3,023 debtor applications for bankruptcy in the second quarter of 2009–10, 74 fewer than in the first quarter.

Debt Arrangement Scheme During the quarter there were 310 Debt Payment Programmes approved, a decrease of 2% on the previous quarter but an increase of 46% on the same quarter in the previous year. Again the rate of increase has reduced, as the previous quarter represented an increase of 83% year-on-year.

Company Liquidations and Receiverships The Accountant in Bankruptcy received 181 notices of Scottish registered companies becoming insolvent or entering receivership in the first quarter of 2009–10. This figure includes 16 receiverships (an increase of 33% on the same quarter last year), 116 compulsory liquidations (44% decrease) and 59 creditors’ voluntary liquidations (31% decrease).

3. Law Society of Scotland Cost of Time Survey 2009 233 law firms in Scotland (19% of total) took part in this annual survey. The results indicate that on average law firms’ profits fell by 30% in the past year and that almost 4% of firms actually made a loss. — Average hourly cost rate down for the first time ever to £140 (£146 last year). — Median profits for all firms down by 30% to £73K (2004 level). — Sole practitioners and the largest firms fared worst. — Small-medium firms down by 20%. — 25% of all 233 firms had profits per partner (before pension provision) of £45K or less and the partners in 10% (i.e. 23 firms) had profits of £19K or less each. — 10 of the 233 firms actually made a loss on the year.

4. Membership of Law Society of Scotland The most recently available figures (September) indicate that there has been no reduction in either the total number of solicitors on the roll or in the total number holding practising certificates since last year. However almost 3% of solicitors have been made redundant, together with a large number of paralegals, legal Processed: 12-03-2010 19:41:27 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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secretaries and front oYce staV. The adoption of flexible working practices has lessened the eVect. Slightly more firms have opened than closed during the past year, suggesting that the profession is adapting to changing circumstances. — Practising Certificates—10,304 (November 2008—10,089). — Roll of Solicitors—12,829 (November 2008—12,465). — Firm Closures since November 2008—30. — Firms Opened since November 2008—38. — Roll and PC numbers remain 2% above November 2008. — Unemployed—303. — Redundant since May 2008—291 (of which 41 have found employment). — Redundant trainees since May 2008—55 (of which 26 have resumed training. — Fall in number of training contracts in 2008 against all-time peak in 2007.

Law Society’s Response to Crisis A. Professional support for solicitors Business Toolkit. Advice on relationship with banks. Employment monitoring. Information for those made redundant. Recruitment website. Education and Training. Lawcare confidential advice and counselling.

B. Representation—for members of profession and public. Lender’s panel issues—implications of removal of member firms on their continuing viability and potential eVect on access to justice. November 2009

Supplementary memorandum from the Law Society of Scotland With particular reference to the additional information the Committee sought with regard to new homes being built in Scotland (questions 491–493 refer) I can provide the Committee with the following information. 1. 19,798 new homes were completed between June 2008 and June 2009 which figure represents a 17% decrease on the previous year’s total of 23,797. 2. The number of new homes being started fell by 41% from 27,313 to 16,166 in that year. December 2009

Supplementary memorandum from Royal Bank of Scotland Group Thanking for giving me the opportunity to provide further detail on a number of issues raised by the Committee when I gave evidence to you in December. I will seek to address each one in turn.

Dubai In our interim results, we reported exposure to the United Arab Emirates overall (including Dubai) of £4.976 billion. This figure comprises exposure on loans and advances, instalment credit, finance lease receivables and mark-to-market on traded instruments across all customer types. It is based on borrower domicile and does not reflect any impact of mitigating action that may have been taken to reduce exposure. Processed: 12-03-2010 19:41:27 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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The Group continues to use its local and specialist expertise to monitor and manage developments in UAE and their impact on the Group’s portfolio. We will be reporting our end of year exposure as part of our 2009 annual results which will be published on 25 February 2010. We do not believe the current exposure is materially diVerent.

Business Lending RBS accept 85% of SME lending applications and this rate has been stable since before the economic downturn. Of the loans approved, less than 0.5% customers rejected the loan oVer on the grounds of pricing which has been stable over the past two years.

Our commercial banking division, which supports business with an annual turnover of between £1 million and £25 million, approved c. 35,000 loans in the 12 months to September 2009. Approximately 160 were rejected on pricing grounds which is c. 0.5%. For the preceding 12 months to September 2008, there were c. 55,000 approvals of which 245 were declined on pricing grounds which again equates to c. 0.5%.

Our business banking division, which supports SMEs with a turnover below £1 million, approved circa 46,000 over the last seven months while c.140 were rejected on pricing grounds. This is around 0.3%. We did not historically track this information but began to in 2009 and will continue to do so. We hope the figures to date will provide the Committee with some degree of reassurance.

RBS are committed to fairness and transparency on pricing and this is reflected in our SME Charter. We have also published a Guide to Lending Pricing for our customers so they are aware of the factors which may contribute to their loan rate. I have included a copy of this Guide for your interest.38

Chairman When Sir Philip Hampton was appointed as Chairman we recognised that the role would require a substantial time commitment, however we did not say that the role was full time—in fact this would have been impossible given that he was still Chairman of Sainsbury and on the Board of Belgacom at that time.

The RBS board were fully consulted before Sir Philip accepted his role at Anglo American. The board is completely comfortable that his duties to RBS are being fulfilled in full and that RBS remains his top priority. UKFI were also consulted on his role at Anglo American and have confirmed they are supportive of the appointment. For most of 2009 the Chairman was on three boards and Chairman of two. In 2010 he will only be Chairman of RBS and a non-executive director on Anglo American.

As it is a non-executive position Sir Philip is not being appointed as Chairman or Chair of any Committees, therefore the RBS Board are satisfied that there are no issues in relation to time commitment. Sir Philip has indicated that, in line with the recommendations of the Walker Review, he will devote as much time as necessary to RBS.

The Walker recommendation states that “The Chairman should be expected to commit a substantial proportion of his or her time, probably not less than two thirds, to the business of the entity, with clear understanding from the outset that, in the event of need, the BOFI chairmanship role would have priority over any other business time commitment.”

Anglo American publishes details of its fees for non executive directors in their Annual Report. The 2008 Annual Report showed this was £65k per annum on his appointment.

Retail Branch Targets StaV in our branch network are set sales targets. The weighting of these has moved significantly in the last two years from loans to savings as the bank seeks to build up its depositor base. Targets will be set locally and depending on a number of factors including their location, customer base and number of staV. There will be some variation. Taking the total figures across the RBS and NatWest branches shows that in 2007, loans contributed to c. 31% of the targets set, this had fallen sharply to c.6% in 2009. In contrast, savings were c.14% of the target in 2007 and went up to c. 24% in 2009. All branch staV are also rewarded for their service based on the customers’ experience and satisfaction. This can be up to 50% depending on their role in the branch. 20 January 2010

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Memorandum from Lord Myners, Financial Services Secretary, HM Treasury Citizens Advice Scotland I am writing further to our discussion at the Scottish AVairs Committee on Banking in Scotland on 13 January 2010.

You asked whether any extra funding would be available for Citizens Advice after March 2010. As I expect you know, the 2008 Pre-Budget Report allocated an additional £10 million to Citizens Advice to March 2010, allowing bureaux to open extra hours or at new locations, to help an additional 335,000 people. Over £1 million was also allocated to Citizens Advice in Scotland.

The Pre-Budget Report in December 2009 announced a £5 million extension of funding to Citizens Advice to 2010–11, to allow bureaux to help another 300,000 people by retaining their extended opening hours. The Department for Business Innovation and Skills are currently working with Citizens Advice and Citizens Advice Scotland to agree the proportion of this funding that will go to Scotland.

However, I can confirm I have now raised this matter with the Chancellor as I promised to do during the committee hearing. 22 January 2010

Supplementary memorandum from Unite the Union RESPONSE TO A REQUEST FOR FURTHER INFORMATION ON BONUSES AND JOB LOSSES FROM THE SCOTTISH AFFAIRS COMMITTEE Performance management structures and target based bonuses are used throughout the finance sector to measure individual and group performance. The type and nature of bonus schemes in retail banking varies considerably throughout the sector. There are bonus schemes based on the role performed. There is individual bonus schemes based upon performance as well as branch bonus schemes linked to Customer Satisfaction. There is also an annual bonus which is often linked to company performance and profits.

Methodology used to Develop Targets In RBS sales targets are based upon Customer Value Points (CVP) with individual products attracting diVerent CVP. Branches will have a CVP target and each member of staV will have their own individual target. The target for branch and roles are set nationally and cascaded to the regions. There is no negotiation, no mutual agreement reached. CVP will be set dependent upon the size of the branch, foot-fall, account base etc. The total CVP target can be achieved through any mix of sales.

In LBG the company identifies which products they wish to sell and weighs them accordingly. Each sales adviser has a target related to points. Early in 2008 a credit card sale would be worth 20 points with an additional 20 points for credit card insurance. Now a credit card sale is worth 8 points but credit card insurance—which provides greater profit margins with the least outlay—is worth 32 points. Targets are imposed without negotiation.

Impact on Employees In RBS failure to achieve targets will result in an Action Contract, followed by implementation of the formal disciplinary procedure and ultimately dismissal. Despite repeated requests RBS refuses to provide active statistics on disciplinary hearings due to performance. Branch managers and staV have to attend three daily sales audios, stating what they have sold, what they will sell, and if they haven’t sold what the employee intends to do about it.

Employees are asked to complete daily sales figures and are advised to stay behind, working unpaid, to ensure they obtain appointments by calling customers. This pressure can lead to dysfunctional selling.

RBS has introduced Peer Group Relativity which measures individuals against their peers. This is an un- popular procedure with Unite members as while individuals can control their own ability to perform they are also subject to the performance of their colleagues.

RBS has introduced a new Performance Procedure which will enable the bank to exit a member of staV from employment through the disciplinary procedure by way of capability within 12 weeks.

In LBG processes exist with staV coached in positive selling techniques. Failure to obtain the necessary targets will result in Performance Improvement Plans (PIPs) and ultimately dismissal. Processed: 12-03-2010 19:41:28 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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There is no doubt that sales targets of this sort change behaviour and are at the expense of service. This may also encourage the pushing of debt based products as staV concentrate on products such as credit cards and insurances weighted higher than deposit taking products. These pressures have caused friction between staV who “cherry pick” which customers they want to serve, and the performance management procedures punish even those who meet objectives.

Overview of Issues Evident in the Sector There would appear to be issues with regards to targets at a local level in a number of companies. Localised targeting by managers has created particular issues with regards to bullying and harassment, unpaid overtime and increase in stress levels. This could be down to a combination of factors including low staYng levels, low morale, staV attrition and the threat of redundancy where remaining staV are being asked to make up the shortfall. While there is evidence that targets are not being increased there is little evidence that targets are being reduced greatly. Given the economic climate, the lack of credit available, consumer mistrust of the sector, negative media reports of “bankers” and the high levels of unemployment there is less opportunity for employees to “make sales”. This has created pressures between employers and employees. Targets remain a significant component in measuring performance and therefore pay. There has been an increase in the level of those subject to the formal disciplinary procedure in most companies and a significant increase in disciplinaries which are based on issues around performance management. It could be argued that a pay system which is linked to performance eg Total Rewards is designed to keep basic pensionable pay low, which is then topped up with non-contractual, non-pensionable bonuses. Providing what employers deem to be a reasonable total pay package. However as products become diYcult to sell and targets become increasingly diYcult to reach, this has highlighted the poor pay rates within the sector for the majority of employees. For some employees reaching their target and obtaining their bonus is necessary to support themselves and their families and this pressure may therefore drive certain individuals to dysfunctional selling. A motion was carried at the 2009 Finance Sector Conference which states that employers are continually increasing targets on a quarterly basis in the Retail Bank and this can result in misselling, bullying and harassment, unpaid overtime, stress and sickness. The motion calls on Unite to lobby the Government to ensure that the employees “voice” is heard and action is taken against employers for setting unrealistic targets. This motion summarises the disappointment that Unite members have with imposed targets and an inability to influence employers on this issue. Employees in the finance sector have faced considerable stresses and pressure in recent times with many still facing the threat of redundancy. This is more frustrating for Unite members given that the Government has a stake in many finance sector companies and have stated that they do not wish to intervene in a company’s strategic decision-making process. Unite would argue that the Government has a duty to ensure employers behave responsibly including treating their employees fairly and that the opportunity is made available for employees to influence the practices, procedures and processes of the pay and bonus system in two-way dialogue with employers which gives greater consideration to what is reasonable and achievable. Ultimately Unite would wish to see an increase in basic pensionable pay rates which rely less on bonus payments to top-up low pay.

Job Losses RBS has informed Unite that divestment of Nat West Branches, RBS Insurance, Global Merchant Services and Technology and Business Services are all likely to impact on job losses in Scotland. However it is impossible at this stage to provide the Committee with a figure on the level of redundancies either voluntary or compulsory for a number of reasons. — There is presently a bidding process for the retail network underway which is likely to highlight a number of potential buyers. What the successful bidder then decides to do in respect of the workforce will become clear at some point in the future. — Unite is not recognised within RBS Insurance and therefore is unable to state with any accuracy how divestment will impact on this division of the business. — The timescales provided for completion of the divestment is four years and therefore divestments may take place at diVering paces and cannot be quantified at this time. While the number of people impacted by divestment within LBG and RBS is around 25,000 Unite is not in a position to provide figures on the level of redundancies at this time. 27 January 2010 Processed: 12-03-2010 19:41:28 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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Supplementary memorandum from Citizens Advice Scotland 1) We sent through constituency profiles in hard copy for each of the members of the committee at the start of December. I have attached them with this just in case. The profiles show the diVerent levels of debt across local areas in Scotland (Annex 1). The following tables show the total debt issues and debt handled by Scottish bureaux in the last few years:

Table 1 SCOTTISH CAB NEW DEBT ISSUES

Year New debt All new Debt as % Debt handled Ave. no. issues enquiries of all new debts pre enquiries client 2008–09 105,300 500,910 21.0 £271,238,254.00 6 2007–08 90,154 459,917 19.6 £197,614,452.58 6 2006–07 91,192 441,228 20.7 £178,755,923.94 5 2005–06 88,307 442,550 20.0 £211,551,614.43 5 2004–05 74,589 430,621 17.3 £157,871,162.00 4 2003–04 65,827 405,858 16.2 £130,528,187.10 4 2002–03 62,028 398,521 15.6 £100,613,593.91 4 Source: Bureau statistics and Bureau Characteristics Survey, Citizens Advice Scotland CAS undertook a detailed study of our debt clients, “Drowning in Debt”, which was published in June 2009. The main findings from the report were: — Debt amongst Scottish CAB clients has increased substantially and is more than 50% higher than in 2003. — The average total debt per client is £20,193. — The average debt to monthly income ratio has risen by a quarter since 2003 and stands at 27.7 (almost £28 debt for each £1 of monthly income). 2) We are currently conducting a survey of bureaux to gauge the impact of the recession. Anecdotally, many bureaux have reported that they currently have waiting lists of clients waiting for specialist money advice. However, clients are seen quickly by generalist advisers who are able to help them with many queries and can make sure that they are prepared for the money adviser if appropriate. Bureaux have used additional credit crunch funding to recruit more advisers and expand opening hours. 3) CAS produced a detailed report on banking practices last year—this is also attached.39 The report contains the most problematic areas of banking for our clients that we would like to see addressed. 4) We are unable to name banks specifically, but the problems that our clients bring to bureaux concern all the major banks in Scotland, with many problematic policies common to all the banks. However, many of our clients are currently taking the Low Income Low Assets (LILA) route to bankruptcy, and statistics from the Accountant in Bankruptcy show that HBOS and Lloyds are the most common creditors for those going bankrupt, followed by RBS, Capital One Bank, and Barclays Bank. This doesn’t show that these banks are performing poorly,but that they are the banks that clients are most likely to be in debt to. Statistics for Protected Trust Deeds show similar findings. 29 January 2010

Annex 1 CAB CONSTITUENCY PROFILES Dundee West—November 2009 Issues in Dundee West In 2008–09 the Citizens Advice Bureau serving the constituency of Dundee West (Dundee CAB) dealt with over 11,295 new client issues, and secured £1,000,083 in financial gain for its clients. The top three types of problem brought to the bureau, sorted by frequency, were:

Issue No. of new issues Percentage of new issues 1. Benefits 3,587 32% 2. Consumer 2,080 18% 3. Employment 1,563 14%

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Debt issues are not recorded under one distinct heading but across eight categories—eg consumer debt, benefits debt, housing debt etc—and in 2008–09 made up 15% of all new issues reported by the bureau in Dundee West.

Debt in Dundee West In 2008–09, Dundee CAB dealt with debt totalling £1,246,311. The types of debt issues handled by the bureau included:

Debt No. of new issues Percentage of new Debt issues 1. Consumer 1,150 68% 2. Housing 150 9% 3. Utility 129 8% 4. Taxes 124 7% 5. Benefits 55 3%

There were 1,844 debt issues that are classified as repeat issues and not included in the table above. This is because a number of clients required more than one visit before their issue could be resolved. Evidence gathered in “Drowning in Debt” suggests that debt advice work has become more complex resulting in money advisers working with clients over long periods of time.40 — Consumer debt represents 82% of all debt issues and 10% of all new issues. — On average, these debt clients had 6 debts each. — The average debt owed is £18,062.48, this is £3,026.48 more than the Scottish CAB average of £15,036 for 2008–09.41 — The bureau handled 1% of all debt issues reported across Scotland, accounting for 0.46%42 of all outstanding debt owed by Scottish bureaux clients.

Glasgow Central—November 2009 Issues in Glasgow Central In 2008–09 the Citizens Advice Bureau serving the constituency of Glasgow Central (Glasgow—Central CAB) dealt with over 12,965 new client issues, and secured £6,882,869 in financial gain for its clients. The top three types of problem brought to the bureau, sorted by frequency, were:

Issue No. of new issues Percentage of new issues 1. Consumer 4,055 31% 2. Benefits 2,809 22% 3. Employment 1,399 11%

Debt issues are not recorded under one distinct heading but across eight categories—eg consumer debt, benefits debt, housing debt etc—and in 2008–09 made up 31.5% of all new issues reported by the bureau in Glasgow Central.

Debt in Glasgow Central In 2008–09, Glasgow—Central CAB dealt with debt totalling £13,546,937. The types of debt issues handled by the bureau included:

Debt No. of new issues Percentage of new Debt issues 1. Consumer 3,220 79% 2. Taxes 303 7% 3. Utility 224 6% 4. Housing 199 5% 5. Benefits 73 2%

40 Citizens Advice Scotland, “Drowning in Debt” Research report, published 10 June 2009. 41 This is an estimate: Information is still being collated by two bureaux. 42 This is an estimate: Information is still being collated by a CAB and the amount of debt reported by this bureau in 07/08 was used in the 08/09 Scottish CAB total. Processed: 12-03-2010 19:41:28 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

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There were 8,081 debt issues that are classified as repeat issues and not included in the table above. This is because a number of clients required more than one visit before their issue could be resolved. Evidence gathered in “Drowning in Debt” suggests that debt advice work has become more complex resulting in money advisers working with clients over long periods of time.43

— Consumer debt represents 85% of all debt issues and 25% of all new issues.

— On average, these debt clients had eight debts each.

— The average debt owed is £5,250.75, this is £9,785.25 less than the Scottish CAB average of £15,036 for 2008–09.44

— The bureau handled 3.4% of all debt issues reported across Scotland, accounting for 5% of all outstanding debt owed by Scottish bureaux clients.

Glasgow South West—November 2009 Issues in Glasgow South West In 2008–09 the Citizens Advice Bureau serving the constituency of Glasgow South West (Glasgow— Greater Pollock CAB) dealt with over 4,436 new client issues, and secured £1,226,971 in financial gain for its clients.

The top three types of problem brought to the bureau, sorted by frequency, were:

Issue No. of new issues Percentage of new issues 1. Benefits 1,639 37% 2. Consumer 968 22% 3. Legal 318 86%

Debt issues are not recorded under one distinct heading but across eight categories—eg consumer debt, benefits debt, housing debt etc—and in 2008–09 made up 27% of all new issues reported by the bureau in South West.

Debt in Glasgow South West In 2008–09, Glasgow—Greater Pollock CAB dealt with debt totalling £2,323,893. The types of debt issues handled by the bureau included:

Debt No. of new issues Percentage of new Debt issues 1. Consumer 754 63% 2. Taxes 129 11% 3. Housing 120 10% 4. Utility 98 8% 5. Benefits 82 7%

There were 5,531 debt issues that are classified as repeat issues and not included in the table above. This is because a number of clients required more than one visit before their issue could be resolved. Evidence gathered in “Drowning in Debt” suggests that debt advice work has become more complex resulting in money advisers working with clients over long periods of time.45

— Consumer debt represents 71.6% of all debt issues and 17% of all new issues.

— On average, these debt clients had 11 debts each.

— The average debt owed is £7,746.31, this is £7,289.69 less than the Scottish CAB average of £15,036 for 2008–09.46

— The bureau handled 1.9% of all debt issues reported across Scotland, accounting for 0.86%47 of all outstanding debt owed by Scottish bureaux clients.

43 Citizens Advice Scotland, “Drowning in Debt” Research report, published 10 June 2009. 44 This is an estimate: Information is still being collated by two bureaux. 45 Citizens Advice Scotland, “Drowning in Debt” Research report, published 10 June 2009. 46 This is an estimate: Information is still being collated by two bureaux. 47 This is an estimate: Information is still being collated by a CAB and the amount of debt reported by this bureau in 07/08 was used in the 08/09 Scottish CAB total. Processed: 12-03-2010 19:41:28 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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Glenrothes—November 2009 Issues in Glenrothes In 2008–09 Citizens Advice & Rights Fife (CARF) dealt with over 40,731 new client issues, and secured £13,645,911 in financial gain for its clients.

The top three types of problem brought to the bureaux in Glenrothes, sorted by frequency, were:

Issue No. of new issues Percentage of new issues 1. Benefits 3,302 40% 2. Consumer 1,228 15% 3. Employment 686 8%

Debt issues are not recorded under one distinct heading but across eight categories—eg consumer debt, benefits debt, housing debt etc—and in 2008–09 made up 34.5% of all new issues reported by the bureau in Glenrothes.

Debt in Glenrothes In 2008–09, CARF dealt with debt totalling £20,662,996. The types of debt issues handled included:

Debt No. of new issues Percentage of new Debt issues 1. Consumer 11,198 80% 2. Utility 866 6% 3. Taxes 778 6% 4. Housing 752 5% 5. Benefits 278 2%

There were 9,204 debt issues that are classified as repeat issues and not included in the table above. This is because a number of clients required more than one visit before their issue could be resolved. Evidence gathered in “Drowning in Debt” suggests that debt advice work has become more complex resulting in money advisers working with clients over long periods of time.48

— Consumer debt represents 82% of all debt issues and 30% of all new issues.

— On average, these debt clients had eight debts each.

— The average debt owed is £18,221.34, this is £3,185.34 more than the Scottish CAB average of £15,036 for 2008–09.49

— The bureau handled 6.4% of all debt issues reported across Scotland, accounting for 7.6%50 of all outstanding debt owed by Scottish bureaux clients.

Livingstone—November 2009 Issues in Livingstone In 2008–09 the Citizens Advice Bureau serving the constituency of Livingstone (CAB—West Lothian) dealt with over 10,086 new client issues, and secured £859,555 in financial gain for its clients.

The top three types of problem brought to the bureau, sorted by frequency, were:

Issue No. of new issues Percentage of new issues 1. Benefits 1861 19 2. Consumer 1828 18 3. Legal 1094 11

Debt issues are not recorded under one distinct heading but across eight categories—eg consumer debt, benefits debt, housing debt etc—and in 2008–09 made up 16.3% of all new issues reported by the bureau in Livingston.

48 Citizens Advice Scotland, “Drowning in Debt” Research report, published 10 June 2009. 49 This is an estimate: Information is still being collated by two bureaux. 50 This is an estimate: Information is still being collated by a CAB and the amount of debt reported by this bureau in 07/08 was used in the 08/09 Scottish CAB total. Processed: 12-03-2010 19:41:28 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

Ev 172 Scottish Affairs Committee: Evidence

Debt in Livingston In 2008–09, CAB—West Lothian dealt with debt totalling £4,494,725. The types of debt issues handled by the bureau included:

Debt No. of new issues Percentage of new Debt issues 1. Consumer 981 60 2. Taxes 232 14 3. Housing 210 13 4. Utility 93 6 5. Benefits 67 4

There were 1,480 debt issues that are classified as repeat issues and not included in the table above. This is because a number of clients required more than one visit before their issue could be resolved. Evidence gathered in “Drowning in Debt” suggests that debt advice work has become more complex resulting in money advisers working with clients over long periods of time.51

— Consumer debt represents 68.2% of all debt issues and 10% of all new issues.

— On average, these debt clients had seven debts each.

— The average debt owed is £28,998.23, this is £13,962.23 more than the Scottish CAB average of £15,036 for 2008–09.52

— The bureau handled 0.86% of all debt issues reported across Scotland, accounting for 1.7%53 of all outstanding debt owed by Scottish bureaux clients.

North Aryshire and Arran—November 2009

Issues in North Ayrshire and Arran In 2008–09 the Citizens Advice Bureau serving the constituency of North Ayrshire and Arran (North Ayrshire Citizens Advice Service) dealt with over 13,406 new client issues, and secured £3,792,397 in financial gain for its clients.

The top three types of problem brought to the bureau, sorted by frequency, were:

Issue No. of new issues Percentage of new issues 1. Benefits 4,048 30% 2. Consumer 3,236 24% 3. Employment 1,434 10.7%

Debt issues are not recorded under one distinct heading but across eight categories—eg consumer debt, benefits debt, housing debt etc—and in 2008–09 made up 24% of all new issues reported by the bureau in North Ayrshire and Arran.

Debt in North Ayrshire and Arran In 2008–09, North Ayrshire Citizens Advice Service dealt with debt totalling £10,800,000. The types of debt issues handled by the bureau included:

Debt No. of new issues Percentage of new Debt issues 1. Consumer 2,177 68% 2. Utility 300 9% 3. Housing 274 8.6% 4. Taxes 235 7% 5. Benefit 97 3%

51 Citizens Advice Scotland, “Drowning in Debt” Research report, published 10 June 2009. 52 This is an estimate: Information is still being collated by two bureaux. Processed: 12-03-2010 19:41:28 Page Layout: COENEW [O] PPSysB Job: 439642 Unit: PAG8

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There were 7,033 debt issues that are classified as repeat issues and not included in the table above. This is because a number of clients required more than one visit before their issue could be resolved. Evidence gathered in “Drowning in Debt” suggests that debt advice work has become more complex resulting in money advisers working with clients over long periods of time.53 — Consumer debt represents 83% of all debt issues and 16% of all new issues. — On average, these debt clients had five debts each. — The average debt owed is £13,316.89, this is £1,719.11 less than the Scottish CAB average of £15,036 for 2008–09.54 — The bureau handled 2.8% of all debt issues reported across Scotland, accounting for 4%55 of all outstanding debt owed by Scottish bureaux clients.

Perth and North Perthshire—November 2009 Issues in Perth and North Perthshire In 2008–09 the Citizens Advice Bureau serving the constituency of Perth and North Perthshire (Perth CAB) dealt with over 12,711 new client issues, and secured £4,836,896 in financial gain for its clients. The top three types of problem brought to the bureau, sorted by frequency, were:

Issue No. of new issues Percentage of new issues 1. Benefits 3,847 30% 2. Consumer 2,597 20% 3. Employment 1,931 15%

Debt issues are not recorded under one distinct heading but across eight categories—eg consumer debt, benefits debt, housing debt etc—and in 2008–09 made up 17% of all new issues reported by the bureau in Perth and North Perthshire.

Debt in Perth and North Perthshire In 2008–09, Perth CAB dealt with debt totalling £7,490.877. The types of debt issues handled by the bureau included:

Debt No. of new issues Percentage of new Debt issues 1. Consumer 1,568 72% 2. Taxes 186 8% 3. Housing 138 6% 4. Utility 116 5% 5. Benefits 67 3%

There were 7,402 debt issues that are classified as repeat issues and not included in the table above. This is because a number of clients required more than one visit before their issue could be resolved. Evidence gathered in “Drowning in Debt” suggests that debt advice work has become more complex resulting in money advisers working with clients over long periods of time.56 — Consumer debt represents 82.8% of all debt issues and 12.3% of all new issues. — On average, these debt clients had seven debts each. — The average debt owed is £24,479.99, this is £9,443.99 more than the Scottish CAB average of £15,036 for 2008–09.57 — The bureau handled 2.65% of all debt issues reported across Scotland, accounting for 2.8%58 of all outstanding debt owed by Scottish bureaux clients.

53 Citizens Advice Scotland, “Drowning in Debt” Research report, published 10 June 2009. 54 This is an estimate: Information is still being collated by two CAB. 55 This is an estimate: Information is still being collated by a CAB and the amount of debt reported by this bureau in 07/08 was used in the 08/09 Scottish CAB total. 56 Citizens Advice Scotland, “Drowning in Debt” Research report, published 10 June 2009. 57 This is an estimate: Information is still being collated by two bureaux. 58 This is an estimate: Information is still being collated by a CAB and the amount of debt reported by this bureau in 07/08 was used in the 08/09 Scottish CAB total. Processed: 12-03-2010 19:41:28 Page Layout: COENEW [E] PPSysB Job: 439642 Unit: PAG8

Ev 174 Scottish Affairs Committee: Evidence

Supplementary memorandum from Lloyds Banking Group LBG Response to SAC Additional Questions 1. Have UKFI and the remuneration committee of the Lloyds Banking Group held discussions on bonus payments and if so, what was the outcome of those discussions? We work very closely with the FSA and UKFI to ensure that our remuneration structure is aligned to prudent risk management and the delivery of significant benefits for our shareholders. We recognise that remuneration in the financial services sector is a sensitive issue for shareholders and society in general. We, along with the other major UK banks, have signed up to the G20 principles of remuneration. Our aim is to be leading edge in our remuneration practices with regard to the G20 principles, the FSA Code and relevant recommendations from the Walker Review. We are not an investment bank. We are a retail and commercial bank with the typical bonus payout— when one is awarded—being £1,000. Any bonus is always discretionary and subject to stretching performance targets. In our Annual Report and Accounts we said that any bonus awarded to executive directors for 2009 performance will be deferred and paid over three years and will be subject to clawback if the performance conditions under which the award is made are not found to be sustainable.

2. How does Lloyds Banking Group’s level of mortgage lending in Scotland compare to the rest of the UK? Unfortunately, we are not able to provide this data as we are in a closed period and it is commercially sensitive.

3. What is the current rate of repossessions in Scotland for Lloyds Banking Group? How does this compare to the last few years? We do not have specific data on Scottish figures but our mortgage arrears are in line with the Council of Mortgage Lenders industry average. CML industry average data show that 2.40% of all mortgages in the UK were more than three months in arrears at the end of September 2009. Detailed UK-wide information on mortgage impairments and lending will be included in our final results on 26 February. As a responsible lender, we wish to ensure customers only borrow what they can aVord to repay. Each customer’s circumstances are diVerent and we use an aVordability model, to better assess a customer’s ability to repay, in order to achieve this. Reducing impairment and sympathetically managing borrowers in distress remain clear priorities of our business. We only consider repossession as a last resort. Our repossessions remain well below CML industry average levels in 2009.

4. You told us that 85% of business applications for funding are converted to loans. Could you break these types of general figures down and tell us: a) how many new business loans are being approved; b) how many applications are for extensions, etc., and c) how many renewals have more onerous terms than previously oVered to those the businesses? We do not have a Scottish figure for the percentage of loans drawn against total new borrowing, but across the UK it is 50% of all new borrowings and we would expect a similar figure to be recorded in Scotland. With regard to extensions or more onerous terms, neither would be a common feature across our loan portfolio. In terms of extensions, we would try to refinance a facility over a longer term if the business was struggling to meet current commitments but the lower interest rate environment is making such refinance requests less likely at present. Similarly, once a loan facility has been approved then we would not re- negotiate the terms and conditions midway through its term. The only event that would create such a change would be a breach of the original loan agreement. 29 January 2010

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