Examination of Witnesses (Questions 60-79)|
19 OCTOBER 2005
Q60 Ms Keeble: You could perfectly
easily do a partnership, presumably with some other organisation,
to provide the equity-backed scheme and you could have your own
product and you could partner those, could you notor not?
Mr Cook: If I partnered with someone,
they would have to do the cash one as well, and then I would be
selling a product where the money was going somewhere else. That
is not my remit. My remit is to bring the money in to fund government
activity. I would be selling something, but I would not be fulfilling
the remit of bringing cash in.
Chairman: It sounds like something we
ought to pursue elsewhere, does it not?
Q61 Mr Love: I was just going to
make that point, Mr Chairman. Since the National Savings and Investments
has great attractions for the very group that will receive these
child trust fund vouchers, it seems absolutely crazy that they
are constructed in a way that militates against National Savings
and Investments being involved. I do not think that is something
they can answer, but it may well be something that we want to
come back to. We received a memorandum from the building societies
on a variety of issues but, before I get on to them, following
up on a point that was made by the Chairman at the beginning,
the building societies asked a question why you have stopped publishing
product data on a monthly basis. The Chairman asked you why you
had not put it in your annual report. They are asking why you
do not do it on a monthly basis. I would like to ask you this
question. Have you stopped producing this sort of information
for some particular reason? Just to save money?
Mr Bayley: No. The information
was formerly given to the ONS and published by them monthly. When
we talked to them about it, they did not need that data and we
took the view that, for us to disclose it, was actually anticompetitive
to us. We do not get the Abbey National or the Halifax disclosing
their financial data, so we took the view that we would not do
so. It is of course available, if anyone wanted to ask, under
the Freedom of Information Actand no one has.
Q62 Mr Love: Interesting. Maybe when
someone reads our minutes, they will discover that fact for themselves.
The import of the memorandum we received is that National Savings
and Investments have some natural advantages over your other competitors
in the marketplace. You obviously have the tax-free products and,
although you have netted off the tax advantage, many people think
that is a natural advantage. We have already talked about it being
absolutely risk-free, being from the Government. Adding those
two together, if it were to be decided that either those other
financial institutions could have the tax-free nature that is
already available to National Savings, or that you stopped having
that particular advantage, how would that affect your business?
Mr Cook: Certainly I have heard
the building societies' concern and I have met with the Building
Societies Association to discuss it. The reality is that the building
societies are under attack from a number of quarters. At the current
time, the amount of money deposited in cash rather than equities
is growing quite strongly, and our share of that marketplace as
a result is falling. So any suggestion that we are distorting
the market would be difficult to sustain, because our market share
over the last three or four years of the cash-based market has
dropped from about 12% to 8%. However, there have been some very
significant new entrants, such as ING who, in a very short period
of time, have amassed about £20 billion funds under management,
which have undoubtedly had a big impact on the building society
movement. That said, they are nevertheless still growing. There
are many pressures, but I think that it is difficult to sustain
the contention that the way we compete in the marketplace is distorting
the market, when our market share of that very market is falling.
Q63 Mr Love: They could make the
claim that if it were a level playing field, you would be even
less competitive than clearly you are in the marketplace at the
Mr Cook: They could maintain that,
Q64 Mr Love: One of the concerns
they have of course is that, unlike other financial institutions,
building societies have to raise at least 50% of their deposits
from the retail sector, and banks and others can raise as much
as they like in the wholesale markets, and therefore they feel
this acutely. How can we create a more competitive retail sector?
What would your organisation, National Savings and Investments,
like in order to be able to achieve that more competitive market?
Mr Cook: I am not in a position
to comment on what the right framework for the building society
movement should be. What I do believe is that National Savings
and Investments' product range offers some very clear, very simple
and very transparent offers, which make a worthwhile contribution
to the retail savings market. I think there is an argument for
many, if not most, people to have an element of their savings
in National Savings and Investments, but we have always been very
careful to maintain that we would not expect to have someone's
entire investment portfolio. You are never going to get the market-leading
return if you keep all your money in cash, but it has to make
sense to have a proportion in cash. So I think that what we want
is a retail savings, retail financial services, market that offers
genuine choice and genuine options, but they need to be clear,
straightforward and transparent. I believe that we are offering
some of those options, with unique products like Index-Linked
Savings Certificates and Premium Bonds, which make a worthwhile
contribution to the choice for individuals in this country. However,
they are not the only place people should put their money.
Q65 Mr Love: Someone mentioned earlier
about dormant accounts being fed through to the charitable sector.
Indeed, we understand that the Treasury is currently likely to
come forward to a recommendation in that regard. As I understand
it, however, that will not cover National Savings and Investments,
who will continue to have access to these. That is another, if
you like, gripe on behalf of the building societies. I do not
want you to comment on that, because that is clearly a decision
for the Treasury and not you. What I did want to go on and talk
about are other advantages that other parts of the marketplace
believe that you have at the particular time. One is compliance
with the FSA rule book. Can you tell the Committee whether you
fully comply with the FSA rule book, as other financial institutions
have to do?
Mr Cook: It is certainly the case
that we are subject to a different governance structure. In fact,
I am experiencing that different governance structure as I sit
here now! In my previous career I have been an FSA-approved person
and now a Government "Accounting Officer". It would
be terrible to be both, I am sure! Both are demanding. Both are
demanding in slightly different ways. There are many aspects of
the FSA regulatory infrastructure that just do not apply to NS&I
because we do not have the funds under management; so many of
the aspects that are all round the security of the organisation
do not apply in our instance. Where there is a significant point
is anything where we touch the consumerin terms of financial
promotion or advertising, the way we would handle complaints,
the way we would price and behave in the marketplace, in terms
of rates going up and down. With that in mind, since I have joined
the organisation we have subscribed to the Banking Code. We are
now a member of the Banking Code Standards Board and, from 1 September
this year, we came under the jurisdiction of the Financial Ombudsman
Service. It is voluntary jurisdiction because the Financial Services
and Markets Act specifically exclude National Savings and Investments.
We had an independent arbitrator for complaintsor "adjudicator"
as he was calledbut, because he was known as the National
Savings and Investments Adjudicator, I do not think customers
ever truly believed that he really was as independent as was indeed
the case. So we have gone the "whole hog" and submitted
to the Financial Ombudsman Service. Financial promotions is the
third area I have talked about. What we have done of late is significantly
enhance our compliance function. We have hired someone from the
FSA to head up our new compliance team and we are building a strong
compliance team under her, to give us that sort of assurance.
We are putting ourselves through external review, in the form
of bringing in a firm of consultants with experts in FSA regulation,
to benchmark us against what I might call the visible, customer-touching
aspects of the process. The first time we did that, we identified
a number of areas of action and we are working our way through
that action plan to make sure that we comply. So we are not FSA-regulated.
It would be a legislative issue for us to be able to become regulated.
What we are aiming to do as an organisation though, is to live
within the spirit of those rules, in so far as they affect the
way customers deal with us.
Q66 Mr Love: It is very refreshing
in that, normally at that point when I ask the question, other
organisations will go into the usual argument about the burden
of regulation. Let me ask you that question by another route.
Do you think the burden of regulation on National Savings and
Investments is greater or less than the burden of regulation on
other financial services organisations? Are there any figures
to tell us at the relative
Mr Cook: It is growing. I believe
it to be a necessary part of the business. We are usually voted,
this business, as either the first or the second most trusted
financial services provider. That is really to be cherished. I
cannot afford to lose that. So I am less "hung up" about
the relative costs and I am more "hung up" about making
sure that customers do not trust us just because we have been
here for 142 years; they trust us because, in this modern and
more competitive financial services environment, they can trust
us to do the right thing in the right way. We are therefore signing
up to a number of these things. I have to say that I think we
are already doing those things. The National Savings and Investments
Adjudicator for complaints, believe it or not, sat in the Ombudsman
Bureau and worked for Walter Merricks; but it did not quite work,
because customers were not sure. So we are signing up to things
which I think, in spirit, we are already doing. To amend the legislation
for us to be formally regulated is a Treasury issue. To work within
the spirit and make sure that we compete in a way that is fair
for customers and maintains that trust and integrity in the brand
is crucial for us, if we are going to be successful in our current
Q67 Kerry McCarthy: Turning back
to the report, on page 35 you have the figures for net financing,
and you have the target for the forthcoming year. Inthe past few
years it has fluctuated fairlydramatically, from £778.7 million
up to £3,395million and then £1,973 million. Why is
there such a high target for the forthcoming year?
Mr Cook: There is a story. Let
me tell you the story. At the time I joined, the organisation
was actually reducing in size. As I say, 11 weeks in, I had the
privilege to sit here and explain why, if the Government was borrowing,
the organisation was reducing in size. At that time the Government
was coming out of a period of repaying debt and there was not
quite the drive within National Savings to increase the amount
of money invested in it. When I arrived, I saw huge opportunity
in this business, in its potential to grow. The year I joined
was the year that shows the £700 million growth. At the time
I joined, we were £700 million down that year. In the last
six months of that year, we experimented, if you like, to see
if this business was capable of being grown. We ran a pretty significant
promotion on Premium Bonds, and I believe the Chairman of this
Committee received a mailing at that timebecause he pointed
that out to me at the last hearing. We reversed that £700
million reduction to a £700million growth, and it became
apparent that this business could be made attractive to customers.
We then put a proposal in to ministers that suggested that, over
a five-year period, the business was capable of being grown by
some £15 billion. We produced a plan to do that. Effectively,
we have had almost two spikes within that five-year period. The
first we have already talked about, which was a larger spike,
I must admit, than I ever expected. It was the increasing of the
maximum holding of Premium Bonds, which produced, I must confess,
a surprise £3.5 billion in that particular year. I had expected
the rate of growth to climb over the five years as the offer became
more familiar and more attractive. So we had a better start in
year one, but it was a one-off because we could not play that
card again. The £2 billion we delivered last year was in
line with my original expectation of steadily climbing. The £3.5
billion that we are aiming to deliver this year is, in particular,
a product of the fact that, whilst we believe the sales offer
is now more attractive, the amount of business that will mature
in this year, that ends its three or five-year cycle, is remarkably
low. This must be something to do with the level of activity five
years ago, I suppose. However, if you look at the years before
and you look at the years after, a lot more business is coming
up for maturity. That means we do not have to sell as hard in
order to achieve a given amount of growth, because so much more
of the business is not at risk. It will stick with us. For a given
level of sales activity we are likely to see a bigger growth in
the book of business in this year. So we decided that this was
a good year to do an above-average year for that reason, and that
is why we have set ourselves the target of £3.5 billionwhich
we will probably beat. What we will then do is aim to deliver
the rest of the £15 billion over the remaining two-year commitment.
We will be heading for £3 billion-ish a year.
Q68 Kerry McCarthy: So there is an
overall five-year target of the £15 billion, but it will
be set from year to year.
Mr Cook: Although it is set from
year to year, I have that focus on the five years and we have
planned every penny, because we do track, as I say, when the business
comes up for maturity. It is just unusual that there is a low
amount of money coming up for maturity this year.
Q69 Kerry McCarthy: You do not think
the decline in sales will affect your hitting that target?
Mr Cook: You keep going on about
the decline in sales. The decline in sales was just that we had
a blip in the year with the £30K maximum. Sales at the moment
are rising. Following the TV advertising, we have seen a significant
increase in sales volume. So I think the bigger issue is the relative
attraction to putting your money in cashfor an individual
putting their money in cashas opposed to an equity-backed
product. Clearly, when people feel nervous about equity-backed
products, then they are more likely to come to us. To some degree,
therefore, our popularity would wax and wane, in line with the
sentiment in this country as to where they would like to put their
money. We would always advocate that a proportion of one's savings
should be in something like National Savings and Investments.
You would not want it all in an equity ISA, for example.
Q70 Mr Todd: Siemens provide all
your information technology and customer-facing services, as I
Mr Cook: Yes.
Q71 Mr Todd: So you are wholly reliant
on them as part of your partnership in those aspects of your business.
Mr Cook: Yes.
Q72 Mr Todd: How do you ensure that
you are able to obtain value for money in that contract?
Mr Cook: This was a significant
deal. I think at the time it was done it was the largest PFI deal.
The savings to the taxpayer over the life of the contract are
expected to be in the region of about £500million. The physical
manifestation of that is that we gave Siemens, back in 1999, an
organisation of some 4,000 people, who were turning post round
in an average of nine days; there was no website; there was no
call centre; and there were more computer systems than you could
possibly imagine. Wind the clock forward five and a half years,
the nine-day turn-round is now a three-day turn-round; we have
a 300-seat call centre; we have a website which is winning awards
and has a run rate of about £1 billion a year. The headcount,
while all that has been going on, has fallen to below 2,000. So
the headcount is half what it was, and we are achieving all these
thingsand the business is £10 billion bigger.
Q73 Mr Todd: Looking at the contract
that you have had with them over a period to 2014, you presumably
have a series of milestones within that contract which allowed
you to assess how it was proceeding and whether it was providing
the value expected of it.
Mr Cook: We pay a fixed unitary
fee, which declines over time. It was all pre-agreed at the time
of the original contract. They have to keep up their cost-reduction
progress, if you like, or their costs would get out of line with
what we are paying them. There are a whole series of key performance
indicators where, if they do not achieve them, there are penalty
payments. So there is no point in their cutting the headcount
to reduce cost if it was not a genuine cost reduction, because
they would not be able to meet the service levels and we would
Q74 Mr Todd: I have taken it from
your very flattering statements in the annual report that you
are very satisfied with the performance of this relationshipup
to now at least?
Mr Cook: Yes, very much so. That
was the sentiment I was trying to convey when I described the
degree of transformation.
Q75 Mr Todd: If we try to look forward
nine years to the end of this relationship, how will you place
yourself in the position to provide a competitive choiceif
it be you
Mr Cook: Nine years!
Q76 Mr Todd: . . . to National Savings
in this matter?
Mr Cook: I think it is quite straightforward.
The business would need to be re-tendered without a doubt and,
as it stands today, there are a number of organisations that I
am sure would be very interested in tendering for it: no doubt
the very same organisations that tendered for it last time round.
Q77 Mr Todd: Do you think you will
have a capability within your business to specify that contract
to a standard that would allow that? Can you retain the skills
within your business to do it?
Mr Cook: Yes, in fact we have
enhanced them recently. We have taken on someone from another
government agency as a deputy to my Partnerships and Operations
Director, who actually was part of the formation of the original
deal. When you are a buyer of large-scale services, you have to
be a very intelligent buyer and you cannot afford not to understand,
in huge detail, what it is you are buying. We still haveonly
a few, admittedlystaff on each of the sites that are occupied
by Siemens as, if you like, my eyes and ears. Those people used
to work in that operation. However, the contractual, what you
might call technical procurement skills, are something we value
significantly; because this contract does not stand still. There
is an ongoing workload, for me to make sure that my partnership
contracts team are up to date and up to speed with latest techniques.
Q78 Mr Todd: I must admit that it
is fairly unusualit is not unknown but fairly unusualto
outsource one of the key relationships with your customers, so
that a third party carries out that function on your behalf. Have
you had any discomfort about that: that you do not have the direct
link with your many investors?
Mr Cook: This is probably one
of the deepest outsourcings that you are likely to see. This is
a partnership; this is not a transactional relationship. We are
joined at the hip. Siemens fortunes and NS&I fortunes are
inextricably linkedwhich in some ways is not a bad thing.
When I arrived, I knew that I was stepping into something which
I had not personally experienced before. I had outsourced pockets
of customer service before, but not on this widespread basis.
I guess it took me about three months to recognise that this was
fundamentally a good deal; that we were getting a level of transformation
that, to be frank, I am not sure we had the capability or indeed
the cash to finance.
Q79 Mr Todd: Taking you to the specific
I raisedwhat you would normally expect if you controlled
your own customer-facing function would be that you would have
the tools available to reward them for sales performance and particular
quality indicators on dealing with customers. How do you do that
within a third-party relationship?
Mr Cook: Let me give you an indication
of how close we are. The Siemens account director sits on my management
team. So he is effectively my COO. He attends all meetings. The
only bits we do not include him for, obviously, are when we talk
about Siemens commercial issues. I tour those sites, as does my
top team, as though they are my staff.