Treasury Contents

Examination of Witnesses (Questions 40-59)



  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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