Select Committee on Treasury Minutes of Evidence

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 not—or 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 Act—and 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 present time.

  Mr Cook: They could maintain that, certainly.

  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 consumer—in 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 complaints—or "adjudicator" as he was called—but, 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 remit.

  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 time—because 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 billion—which 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 cash—for an individual putting their money in cash—as 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 understand it.

  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 things—and 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 deduct payments.

  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 relationship—up 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 choice—if 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 have—only a few, admittedly—staff 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 unusual—it is not unknown but fairly unusual—to 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 linked—which 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 raised—what 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.

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