Examination of Witnesses (Questions 40-59)
SIR DAVID
COOKSEY, MR
JOHN KINGMAN,
MR KEITH
MORGAN AND
MR JOHN
CROMPTON
4 NOVEMBER 2009
Q40 Nick Ainger: What is the size
of the pot for 2008?
Mr Kingman: The size of the pot
for 2008 has not been disclosed. The direction that we have been
given by the Chancellor is that we are not to be making disclosures
on behalf of our banks that would go beyond what other publicly
owned businesses would do. That is a very clear direction we have
been given by the Chancellor.
Q41 Nick Ainger: The Treasury has
told you that you are not even to ask the executives of RBS how
big the pension pot is?
Mr Kingman: We as shareholder
had extensive discussions with them about bonus payments.
Q42 Nick Ainger: I understand the
principle but we are talking about the quantum.
Mr Kingman: The issue is about
what information is published and what is not published.
Q43 Nick Ainger: Yes, and I am asking
you what is the quantum of the bonus pot.
Mr Kingman: That information has
not been published by the bank.
Q44 Nick Ainger: Do you know what
it is?
Mr Kingman: Yes.
Q45 Nick Ainger: What is the problem
in disclosing that information, because as you rightly say there
are an awful lot of people out there who are very angry about
this.
Mr Kingman: That is quite right.
This is an issue that we have discussed with the Treasury and
the longstanding principles for businesses in which the government
holds shares are that they are required to follow the standards
that listed companies follow in what they disclose and what they
do not disclose. We have consulted with the Treasury and with
the Chancellor about whether that is the practice we should follow
and we have been instructed that that is the practice we should
follow, just as has been followed for nationalised industries
for many, many years under many governments.
Nick Ainger: We are not talking about
a nationalised industry, although some would argue it already
is. We are talking about organisations that have brought this
and other countries to the brink of financial collapse. One of
the reasons was because of a bonus culture, a remuneration culture,
which rewarded risk. The impression we are getting is it is still
business as usual. I am staggered. Did you challenge the Treasury
on the advice that you have been given?
Q46 Chairman: Maybe the question
is begged: what is the point of you? Since you have gone in, you
have presumably looked at the Treasury Committee report quite
thoroughly and you have seen that the issues of corporate governance
and attitude to risk are big issues. In your answer to Mr Ainger,
could you elaborate on that to help us?
Mr Kingman: I want to be very
clear about this. I think that the public have every right to
expect of us that we ensure that there is not business as usual
at these banks, because these banks were very badly managed. They
mismanaged their approach to risk. They mismanaged their approach
to remuneration. We have worked with them on their boards, on
their remuneration practices, on their risk management and on
their strategies to change the way these organisations are run.
I think we should be absolutely judged on whether or not we have
made a difference there.
Nick Ainger: We will not be able to judge
that until we know the size of the bonus pot. We will not know
that what you are telling us is taking place. It may well be taking
place. We know in principle changes have taken place but what
people out there want to know is what is the quantum.
Q47 Chairman: Give us a flavour of
what you have done.
Mr Kingman: Take RBS. RBS traditionally
paid 100% in cash. That was in my view a very irresponsible approach
to remuneration. After a long negotiation both for 2008 and 2009,
we negotiated a completely different approach such that all of
their payments for people other than the most junior staff are
subject to claw back, are paid over a long period and are paid
in either shares or debt rather than cash. These are not small
changes. They are the most radical changes that anyone anywhere
in the world has achieved. I really think that that is a big deal.
Q48 Nick Ainger: I am not critical
of that. The final bit that everyone wants to know is what change
has happened in terms of the size of the bonus pot.
Mr Kingman: The bonus pot was
vastly lower than was paid, as you would expect given the performance
of the bank, but bonuses were paid in RBS for 2008. They were
paid for the good reason that we have so much money invested in
this bank that we need to hold it together. This Committee I think
rightly recognised that quite explicitly in the report you made.
I understand your frustration but I am not able to publish and
to give you commercially confidential information that other banks
are not required to publish. David Walker is going to raise the
bar on disclosure and we will ensure that our banks are at the
forefront of responding to and implementing the Walker recommendations,
but we are not able to make disclosures that they are not currently
required to make on their behalf. That is the instruction the
Chancellor has given us.
Q49 Nick Ainger: We do not know this
figure. You say it is a lot smaller and obviously one would expect
that but there have been other surprises where for this year it
is indicated that some investment banks—and obviously RBS
has an investment banking section—are going to be paying
out huge sums in bonuses. Again, the public will not know, unless
the other banks follow Walker's recommendation about greater transparency,
what has happened in 2009.
Mr Kingman: The banks will have
to follow Walker's recommendations because they will be required
by the regulator. Those disclosures will be required and our banks
will certainly have to follow them. To take your point about what
has happened this year, it is true that the competitive environment
has changed and it is true that investment banks are making money
and paying bonuses again. In RBS the form in which those bonuses
are paid is reformed. It is our job to challenge as shareholder
whenever they come to us and say, "We think we want to pay
X." We will only sanction that if we are absolutely convinced
that it is in the taxpayer's interest as shareholder to do that.
If you take RBS's investment banking division, it is a very different
operation from what it was. It has been making money. In the first
half of this year it made roughly £5 billion in operating
profit. The taxpayer has an 84% share of that profit. What that
profit has done is eaten into the huge losses to which we would
otherwise be exposed. That is the issue that we have at stake
here and that is the reason we have to try to hold the business
together. Yes, I do expect that our banks should be absolutely
at the outer edge in terms of reformed remuneration practices
that learn the lessons of everything that went wrong, because
remuneration was one of the things that went wrong.
Q50 Mr Breed: Apart from the aspects
of corporate governance you have just alluded to in respect of
bonuses, what else since we met you in March when we discussed
corporate governance have you done to bolster corporate governance
both at RBS and Lloyds?
Mr Kingman: I would like to talk
about two issues, if I may. One is boards and the other is risk
management. If we take boards first, there have been major changes
at both boards of the two large banks in which we are invested.
In the case of RBS, I think I am correct in saying that 14 directors
have now left since last autumn. Obviously there is a new chairman,
a new CEO, a new head of risk, a new head of retail, a new finance
director and there are big changes in the non-executive cadre.
At Lloyds there has obviously been a change of chairman. That
is something in which we were very closely involved. There have
also been a number of changes amongst the non-executive directors.
Five non-executive directors have left Lloyds since last autumn.
I think the boards look very different. That is something that
we take a very close interest in. We have rights of appointment
over certain directorships on those boards and we use those very
actively, but we also talk to the chairmen a great deal about
the nature of boards, what the boards are spending their time
on and their composition. That is one issue. The second issue
is risk management and I think that this is something that shareholders
generally would be wise to take a much closer interest in than
they have done historically. We certainly do. In the case of Lloyds
Banking Group, this is really a matter of, bluntly, cleaning up
the way HBOS was run. I think it is widely recognised that Lloyds
had better risk management practices than HBOS and there is a
great deal going on across the merged entity to impose higher
standards and tougher risk management across the business. In
the case of RBS, there is an absolutely massive job that is being
done and it is not completed yet. We are taking a very close interest
in its completion. There is, as I said, a new head of risk at
RBS, a man called Nathan Bostock. We spend a good deal of time
with him. They are doing two things at RBS. One is they are reducing
the overall risk exposure of business by moving bad assets into
a non-core division which is being run down. That is making a
very big change to the shape of the balance sheet. The other is
imposing new risk standards on the business. For example, they
have strengthened very significantly their single exposure limits,
and the way they allocate risk to different markets. They have
pulled out of 20 countries. They have pulled out of a large number
of businesses on risk grounds because they do not meet the group's
risk standards. For example, leveraged finance which RBS used
to be huge in they have pulled out of completely. The message
I have to give you is I think that is work in progress at RBS.
I cannot put my hand up to the Committee and say, "Job done."
This is a huge bank with 180,000 people. It is being run in a
very different way but ultimately I think Stephen Hester would
agree that it is probably going to take years to be able fully
to say that this bank is now being run in a way that is how we
would ultimately wish it to run.
Q51 Mr Breed: That is extremely helpful
and encouraging. One of the other aspects was the sort of culture
which developed. Information systems did not provide risk information
in the appropriate form and to the appropriate people. Culturally,
there was insufficient challenge from non-executive directors
and indeed others to what may be termed over-powerful chief executives
and such. Are you satisfied that the new boards both have the
information they require in terms of risk management and that
they now have changed the culture of challenge to ensure that
we are not going to make the same mistakes in the future?
Mr Kingman: I am satisfied that
the approach is radically different and that is as it should be
because everything you say is true. Everything that we have seen
about the way these banks were run, certainly in the case of RBS
and HBOS, matches the picture you paint. If you take for example
RBS, RBS did not have a separate risk committee. It had an audit
and risk committee and it is not obvious to me that it spent as
much time on risk as it frankly should have done. Nor does it
seem to me, from what I know of it, that the board itself spent
as much time on risk as it should have done. One of the advantages
I suppose, in a horrible way, of the scale of the crisis is that
at least what you do not have is a bunch of people at RBS saying,
"It was great in the old days. We ran it really well."
I do not think anyone in that bank can seriously be in denial
that the way that bank was run was a disaster. I do not think
I can yet say to you that those boards have perfect information
flows. I do not think RBS would argue that they yet do, but what
I can tell you is that the new boards are very, very focused on
it and that there are risk committees that are taking a proper
interest in sorting all this out.
Q52 Mr Love: Does UKFI have a role
in ensuring a fair deal for the consumer, considering the amount
of public resources that are involved in the companies that you
have a relationship with?
Sir David Cooksey: When you talk
about the consumer, you are talking about the retail customer?
Q53 Mr Love: Yes.
Sir David Cooksey: The answer
is that this is an area in which we have placed some considerable
effort on trying to get the culture right. Both Royal Bank of
Scotland and Lloyds are very conscious of the fact that they have
received very large sums of public money. Whilst there are complaints
about the level of lending, particularly to the smaller business,
we are exerting a degree of pressure to make sure that they respond
to that. I do not know if you like my colleague, John Crompton,
to take that any further?
Q54 Mr Love: Let me carry it just
a little further. Mr Crompton or Mr Kingman can answer. One of
your objectives is to promote competition as a way to benefit
consumers. It also adds to the same paragraph that it respects
the commercial decisions of the financial institutions. Does that
give them a veto over helping the consumer and has that not been
shown to be the case?
Mr Kingman: No. One of the things
I hope we have learned in this crisis is that banks are not going
to make money on a sustainable basis if they treat their customers
badly. Their customer relations matter to them and they need to
matter to them. That is very much the ethos we want to see in
our banks. The area in which in some ways we have confronted this
most directly is perhaps in the wholly owned investments, Northern
Rock and so on, where huge amounts have been done for example
where tough decisions have to be taken about people who cannot
meet their mortgage payments and so on. We absolutely expect our
banks to treat their customers reasonably and fairly. In the end,
there are always going to be situations where banks have to say
no to people who want to borrow.
Q55 Mr Love: Let me give you an example.
This is an example drawn across the whole of the industry. In
September mortgage lenders' margins were just over 3% which was
a record on the statistics. The margin for consumer loans was
almost 8%. Those are dramatic figures. Although we as a Committee
do not answer these questions, we are receiving lots of complaints
from consumers that the banking system is not operating to their
advantage. They are replenishing their capital base or perhaps
paying bonuses to their executives. We were hoping that UKFI might
be able to do something about that.
Mr Kingman: The answer to this
is about competition which is why the announcements yesterday
were so important. There is a dilemma which is, yes, you are right
that margins have widened. It is almost certainly the case that
credit was too cheap at the height of the boom, but the banks
in which we are invested remain massively loss making and the
taxpayer is bearing much of those losses. This is genuinely difficult.
The rebuilding of the banking system is in the interests of customers
as taxpayers as well as customers as customers. This is a difficult
balance.
Q56 Mr Love: If I may say so, what
you are giving us is a balance very much skewed towards the needs
of the banking industry; whereas I would have expected you, since
one of your objectives is to protect the consumer through this,
to have a more balanced view, to say, "Yes, of course risk
was under priced." I think everyone recognises that and there
needed to be an adjustment, but has the adjustment gone much too
far and, more importantly, can we look to UKFI to try and at least
insist that the banking system gets that balance right?
Mr Kingman: We certainly do insist
that they treat their customers well and fairly. I do not have
any brief to stick up for the banking industry but I do have a
brief to stick up for the taxpayer. The problem is the taxpayer
is exposed to these huge losses. The banks are still making enormous
losses and we do have to get back to a sustainable level. I think
that the answer in terms of coming to the right balance is in
ensuring that there is enough competition in the market, which
is why as Mr Fallon was hinting earlier it might be the case that
in order to help establish more competition in the market some
of these businesses might be sold to bidders for something less
than you could theoretically get if you sold them to a really
big player, because you want to see more competition in the market.
That is why we were given the remit that we have in the mandate
we were given by the government. I do not think I can pull back
and say we do not care about the taxpayer any more. We do care
about the losses. We are a bit obsessed with getting these banks
out of these massive losses because it is all coming from taxes
that people are having to pay.
Q57 Mr Love: Let me put you on the
spot. I would not normally do this but RBS have done something.
There has been some movement in terms of their overdraft charges
where they have gone from a penalty rate to an administrative
charge. That is to be welcomed. I cannot think of any other example
where the consumer has benefited since UKFI was set up. Give me
an example of where the consumer has benefited.
Mr Kingman: I would argue that
the principal benefit we have provided in the last year is really
to the consumer in their position as taxpayer. We are helping
the taxpayers get their money back. That is the remit we have
been given by the government. I think it is very important. At
the worst, everyone round here as taxpayers was sitting on a loss
of £26 billion. That has come back over time. It is now slightly
less than £10 billion. Is that good enough? No, it is not.
The point that I completely agree with you on is we cannot do
that in a way that completely ignores the consumer's interest
for example by saying, "We do not care who these businesses
are sold to." We should care. That is why we are given a
balanced remit by the government.
Q58 Mr Love: The Chancellor commented
on this yesterday in the chamber. It is about whether remutualisation
is an option currently when you come to sell these organisations.
The Chancellor said he welcomed diversity and he was open to that
choice. If you look at it in the longer term, building societies
or mutuals have been advantageous to the consumer because the
consumer gets a good deal. Will that play a prominent part in
your decision about how to divest yourself of these organisations?
Mr Morgan: In the case of Northern
Rock, mutualisation is an option that should be considered as
part of our remit to realise value for the taxpayer. The re-mutualisation
does have some interesting characteristics to it. I have read
with interest the report published by the Building Societies Association
and of course they talk about the concept of re-mutualisation,
including the use of profit participating deferred shares. It
is clear from that that the characteristics of that would be,
let us say, a longer term pay back to the taxpayer. When we have
to assess these options and make our recommendations—you
know we must make a recommendation to the Chancellor for a final
decision around realising value in our investments—we would
have to weigh up those sets of considerations against other considerations
which may involve realising value from a sale. If the sale could
realise value more quickly, it would be very difficult to set
that against re-mutualisation. We are not necessarily in that
position.
Q59 Mr Love: What I am anxious to
do is to get a clear commitment that it will not just be a quick
sale and a maximisation in the short term that would be uppermost
in your minds.
Mr Kingman: Let me be very clear
about this. The government has said that mutualisation is one
of the options it will want to consider in the context for example
of the disposal of Northern Rock. We will certainly look at it
on a level playing field with any other option. In the end it
will be a decision for the government because disposal decisions
around any of our assets ultimately go to the Chancellor. The
Chancellor will have to weigh up the pros and cons. You could
easily imagine a situation where one kind of corporate structure
had these pros; another kind had others. There might be a value
choice between them. That is a legitimate policy choice.
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