Examination of Witnesses (Questions 20-39)
SIR DAVID
COOKSEY, MR
JOHN KINGMAN,
MR KEITH
MORGAN AND
MR JOHN
CROMPTON
4 NOVEMBER 2009
Q20 Sir Peter Viggers: What are the
greatest impediments and hazards?
Mr Kingman: One could imagine
a number of impediments and hazards. One would be for example
if we were to be under pressure to make sales artificially quickly.
The position is that we are not under any such pressure but were
we to be under such pressure I think there would be grave dangers
of poor value for money transactions. The other huge danger which
is obviously not in our control is the future path of the economy.
That will be the fundamental determinant of the performance of
shares over time and the value we are able to realise in disposing
of them.
Q21 Sir Peter Viggers: Your mandate
says that UKFI will act as the principal liaison point with each
listed investee company but only with respect to HM Treasury's
role as shareholder in these institutions. That is quite a specific
and finite mandate. What work is the Treasury undertaking, other
than the work you do, and what information do you receive as to
what is discussed?
Mr Kingman: The Treasury has other
responsibilities for financial stability for example. As a member
of the tripartite, the Treasury gets a great deal of information
from the FSA as regulator, from the Bank of England, which we
would not see as shareholder. The other thing is that there are
other parts of government—for example the Department of
Business has a role in assisting the Treasury on monitoring the
lending conditions. There are certainly other strands of government
which have other interests and dealings with the banks on all
sorts of issues.
Q22 Mr Fallon: John Kingman, you
said to the Chairman that you expect the lending conditions to
be met. What will you do if they are not?
Mr Kingman: Strictly speaking,
that will not be our responsibility. They are legal agreements
between the Treasury and them but for example, to give you a very
concrete and practical example, we have agreed with the board
of RBS that meeting the lending conditions should be one of the
conditions of Stephen Hester's bonus payment. We think that it
is entirely appropriate to incentivise him to do that.
Q23 Mr Fallon: Is that the only sanction?
Mr Kingman: No. They are legal
agreements.
Q24 Mr Fallon: I know they are legal
agreements. I want to know what happens if they are not met.
Mr Kingman: They are legal agreements
and what that means is that banks are required to meet them.
Q25 Mr Fallon: I know that. I know
they are required to meet them. I want to know what happens if
they do not meet them.
Mr Kingman: They have to meet
them.
Q26 Mr Fallon: This mandarin speak
is not getting us anywhere. If they do not meet them, apart from
Stephen Hester losing his bonus, what other sanctions are at your
disposal or the Treasury's disposal?
Mr Kingman: I find this extremely
hard to imagine in practice but theoretically the Treasury could
simply sue the banks. I think that is extraordinarily unlikely
because the banks are clear they are going to meet the commitments.
If we were looking at a situation where there was a serious danger
of them failing to meet the lending commitments, we would get
very heavy with them as shareholder because we would see that
as creating major instability in the business that we are invested
in and that would be a very bad thing.
Q27 Mr Fallon: I do not understand
what getting heavy as a shareholder means, other than voting against
Stephen Hester's bonus.
Mr Kingman: It really has not
been our experience that the banks are willing to ignore the views
of us as shareholder on all sorts of things. I would expect the
banks to take very, very seriously any risk that they were going
to fail to meet the lending conditions. That has been absolutely
our experience and the government's experience so far.
Q28 Mr Fallon: Sir David Cooksey,
eventually you are going to sell off Northern Rock and Bradford
and Bingley. How are you going to get best value for the taxpayer
for those two banks and promote competition at the same time in
the banking sector?
Sir David Cooksey: First of all,
we need to separate the good bank at Northern Rock from the bad
bank. In terms of the bad bank and Bradford and Bingley, this
will be a run off of the mortgage portfolios over time or the
sale of those portfolios if that can be done at the right price.
What we need to do there is to make sure that we get the best
possible yield from those portfolios. As far as the good bank
at Northern Rock is concerned, we are clearly mandated as a result
of yesterday's announcement to make sure that we broaden the ownership
in the banking sector.
Q29 Mr Fallon: You would not necessarily
then get best value for it if you are trying to find a purchaser
to broaden choice in the high street.
Sir David Cooksey: That is not
necessarily the case if for instance we encourage a foreign bank
to come in and buy the Northern Rock good bank.
Mr Morgan: The experience of Northern
Rock just over a year ago when there were discussions around its
future showed there were quite a lot of innovative proposals in
terms of taking ownership of Northern Rock. I think it is true
to say that there are people in the market place who are not big
banks who would find value in it. There is value in the 76 branches,
value in the retail deposits it holds and value in the mortgage
origination platform. My expectation is that we would have a fair
number of people interested, both people who are smaller players
or interested in establishing themselves in the country but also
international players as well.
Q30 Mr Fallon: I want to be clear
who will not be allowed to bid. Will none of the existing UK banks
be allowed to bid?
Sir David Cooksey: We have had
no direct instructions from the Treasury as yet, but one would
anticipate that the larger UK existing banks would not be allowed
to bid.
Q31 Mr Fallon: Barclays or HSBC would
not be allowed to?
Sir David Cooksey: That is the
implication of the Chancellor's statement yesterday.
Q32 Mr Fallon: What is your view?
Sir David Cooksey: My view is
that in the interests of the customer and in the interests of
the market as a whole broadening the field would help very considerably.
Mr Kingman: We are not at the
moment in the process of contemplating the sale of this bank.
The key focus for us at the moment is on achieving the split.
There is a huge amount of work under way on that and it is complicated
business. Getting it right is incredibly important. As and when
we have got that through—and we hope that will be done by
the end of the year—then we will start to address the question
at what point is the right point to start to consider selling
that business. There is obviously a very tricky value question
there which we will advise the government on. We will also be
wanting to discuss with the government what constraints it will
want to impose on a sale. At the moment I do not think we have
the kind of depth of understanding of potential buyer interest,
because we are not focused on the sale at this point, to be able
to give you a clear answer that says, "Yes, Santander would
be allowed in" or, "Santander would not be allowed in."
Nobody in government has addressed that question yet because the
business at hand is really about getting the split done.
Chairman: We hope to have you back in
January, Mr Kingman, in order to explain that further to us.
Q33 Mr Tyrie: Just to be clear, in
response to an earlier question from Michael Fallon, there will
be no restrictions on overseas bidders and that would include
sovereign wealth funds?
Mr Kingman: I have no idea whether
a sovereign wealth fund would—
Q34 Mr Tyrie: I did not ask that.
I was asking whether—
Mr Kingman: I envisage no restrictions
on the nationality of ownership of any of our assets.
Q35 Mr Tyrie: Will you be making
an assessment of the long run solvency of the bidders?
Mr Kingman: An assessment would
have to be made and that would be made by the FSA as regulator
because the buyer would be taking on a regulated, British bank.
Q36 Mr Tyrie: You are creating banks
here none of which can have more than 15% of the market. Would
you agree that this will mean these banks will be small enough
to fail?
Mr Kingman: That is a completely
regulatory question on which I do not think it would be possible
for us to comment. We are not a regulator.
Q37 Mr Tyrie: Who is going to examine
that question?
Mr Kingman: The FSA as regulator.
Q38 Mr Tyrie: You are going to consult
with them?
Mr Kingman: Whether or not any
British bank is or is not allowed to fail is in the end a judgment
for the tripartite, advised by the FSA. The shareholder role is
really not the issue.
Q39 Nick Ainger: In reply to our
report on the banking crisis, part of the UKFI response stated
in relation to the bonus culture, "UKFI has worked with both
RBS and LBG to implement what are perhaps the most far reaching
reforms to remuneration structures of any large bank in the world.
Both banks have committed to fundamental reviews of their approach
to future remuneration and UKFI will continue to work with them
on this." What is RBS's bonus pot this year?
Mr Kingman: No decision has been
made on any bonuses at RBS for 2009. What has been decided, as
was announced yesterday, is that as for 2008 there will be no
discretionary cash bonuses paid for 2009 at RBS for anything other
than staff paid less than £39,000 a year. We will as shareholder
need to discuss with RBS what their bonus arrangements should
be for 2009 in terms of quantum, in terms of amount, and I think
that as with all these things that is going to be a hugely important
decision for us. It is one that we will approach from two perspectives.
One is we are here working for the public and the public are understandably
angry, bewildered, I would say, about the payments of bonuses
in the banks in which we are invested. On the other hand, we as
shareholder have a huge interest in holding these banks together.
That is something that every household in Britain has an interest
in. If I may say so, I think the TSC's report brought out that
dilemma very clearly. We have to walk this tightrope by which
we, on the one hand, reform the cultures—and I believe we
really have made a huge difference to the cultures and remuneration
practices in these banks—but, on the other, we cannot afford
to be in a position where the banks lose so many people that we
start to lose serious value. The other point that I would make
here is: this is also playing into investor perceptions of the
banks in which the governments are invested and we are seeing
that. There is a dilemma for government there too because, on
the one hand, government wants to see pay structures reformed.
On the other hand, we need to get the share prices up in order
to reduce the enormous losses that the taxpayer has suffered in
investing in these banks for reasons of financial stability. That
is a terrible dilemma, but that is the heart of what we have to
do on these pay issues.
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