Treasury Contents

Examination of Witnesses (Questions 60-79)



  Q60  Chairman: He did say it was not off the agenda.

  Mr Kingman: He did.

  Q61  Chairman: Is it a case of stuff the consumer to benefit the taxpayer?

  Mr Kingman: No. It is emphatically a question of balance. We have made very, very clear to the boards of our banks that in a whole bunch of respects they need to understand that these banks only exist because of colossal taxpayer support, support from the public. In a whole bunch of ways they operate they need legitimacy. They need to be seen to be treating customers fairly. They need to be behaving in a whole bunch of ways which I think are different than when they were fully private businesses. I think the businesses in which we are invested do get that and, if they did not get that, I would be very concerned.

  Mr Morgan: I think Northern Rock is a very good example of this. The recent announcement to split the bank and to create a new bank which is viable, fit for purpose in the future, independent of state aid, is creating competition in the market place that would not otherwise be there. We are also in a position where that is creating something that has value for the taxpayer and can start to repay some of the debts that the taxpayer has had to stack up. I think it is quite a good example of where competition, consumers and the taxpayer are all aligned.

  Q62  Jim Cousins: Mr Kingman, in the creation of the new bank the existing mortgage book of Northern Rock which is about £65 billion will presumably be split between the new bank and the old bank. What principles will guide that split and what proportion of the existing mortgage book will go to the new bank?

  Mr Morgan: The principles behind creating the two new banks are reasonably straightforward. The first thing is that the size of the new bank is determined pretty much by the size of the retail deposits that are existing currently in Northern Rock. I think we all learned quite a lot over the last couple of years about what makes a strong balance sheet. Access to customer retail deposits is an important component of that. The new bank will have the customer retail deposits within it. It will have the 76 branches within it.

  Q63  Jim Cousins: My question was about the mortgage book.

  Mr Morgan: The mortgages will then be split between the two banks but with the balance sheet obviously being determined by the size of the retail deposits. In splitting the mortgages between the two banks, there are a certain number of considerations. One is that a large number of the mortgages inside Northern Rock are what they call encumbered. It means they are part of a securitisation vehicle or a covered bond vehicle and legally you cannot break it or move it. The mortgages that are within those structures are within Northern Rock asset management, what has been called the bad bank. Other than that, mortgages are then being moved across into the new bank based upon, first of all, is there a customer relationship. If there is a savings relationship there in the good bank, then you move the mortgage where you can and on balance the final consideration is what is the risk profile of the mortgages, where the mortgages that have been put into the new bank are market average, loan to value mortgages.

  Q64  Jim Cousins: What proportion of the existing mortgage book will go to the new bank?

  Mr Morgan: It is approximately 15%.

  Q65  Jim Cousins: That means the great bulk of the mortgage book will stay with the old bank.

  Mr Morgan: Correct.

  Q66  Jim Cousins: There are many, many thousands of home owners who will be part of that mortgage book that is retained by the old bank. It cannot be in the interests either of the taxpayer or of the individuals concerned that they end up being prisoners of an institution which can only offer them a very poor mortgage deal. What is being done and what is being thought about to protect the interests of those many, many thousands of people who will be in the mortgage book that is retained by the old Northern Rock?

  Mr Morgan: The people who are remaining in the old Northern Rock will be on the same mortgage contracts they were on before. Their mortgage contracts will not change. The terms and conditions of their mortgages will not change.

  Q67  Jim Cousins: Those are people of course who, if they possibly could have moved their mortgages, would have been encouraged to do so already. They will be people in the most difficult of circumstances. How are you going to deal with that? Are you going to offer them better mortgage deals as their mortgages run out and have to be renewed, or are you going to offer them harsh deals?

  Mr Morgan: All of the wholly owned companies have to observe the standards of Treating Customers Fairly. It is one of their regulatory responsibilities to do that. Unfair pricing practices such as that would fall foul of Treating Customers Fairly. It would be our job as stewards of these companies, where these boards report to UKFI—in the wholly owned case they report to UKFI—to ensure that these companies did observe Treating Customers Fairly.

  Q68  Jim Cousins: No situation like this on this scale has ever happened before, where a very large number of home owners with mortgages have found themselves effective prisoners of a bank that is doing no new business. Should those mortgage owners be represented on the board? Should the new bank find some way of getting their views, talking to them as a group? This is a very new situation. Nothing like it has ever happened before.

  Mr Morgan: The answer is for the board to exercise its responsibilities and those responsibilities have to be to meet the Treating Customers Fairly obligations. Customers do have many rights of appeal through the existing system in terms of appealing to the Ombudsman, writing directly to the board, writing to the company itself in terms of having their case raised. I think it can be managed with the existing governance systems and regulatory systems that are in place.

  Q69  Jim Cousins: You have not thought about creating new ones to deal with this entirely new situation?

  Mr Morgan: I think the existing systems should be able to manage the situation that we are talking about.

  Q70  Jim Cousins: Sir David, you said earlier that your policy towards the remainder of Bradford and Bingley's mortgage book, which incidentally has these remarkable characteristics of being 60% buy to let, through Bradford and Bingley, the government is now the largest provider of buy to let mortgages in the whole country. In the case of Northern Rock we have just discussed that. You said that what you would do is either run them off over a period of time, which will require governments to be patient—not always, I think you will agree, a characteristic of governments—or dispose of chunks of the mortgage book from time to time. What principles will guide you as to whether to run off or to put lumps of these mortgages into the market?

  Sir David Cooksey: The default option is clearly to run it off. If there are no buyers for the mortgage book or parts of it, it will have to be run off over a very long period of time. There will be times in the market when it will be possible to sell parts of the mortgage book off. In order to realise the maximum return for the taxpayer, what we should be looking for is the opportunity to sell off parts of the mortgage book over time. It will depend on the financial interest rate considerations at the time and the degree of risk the purchaser is prepared to take on.

  Q71  Jim Cousins: You have made it very clear that what would guide you as to the choice between run off or placing clearly the better bits of the mortgage book into the market is the return of the taxpayer. Will you also not have to bear in mind the housing market effects of what you do, because the purchaser of chunks of the mortgage book may behave in particular ways that would have huge housing market effects on trapped groups of home owners who will find it difficult to move their mortgages somewhere else or, in the case of buy to let, a situation in which we are starting with the government as the biggest single provider of buy to let mortgages in the country. There are immense housing market consequences.

  Mr Kingman: It is possible. Any disposal of any UKFI assets will have to be something that is agreed with the Chancellor. Any wider policy considerations—

  Q72  Jim Cousins: Just with the Chancellor? There are broader interests of government than just the Chancellor.

  Mr Kingman: The Chancellor will no doubt talk to his colleagues.

  Q73  Mr Todd: The FSA has conducted due diligence on RBS's assets as part of the review of the APS scheme. Presumably that due diligence has been shared with yourselves?

  Mr Kingman: No, it has not been shared with ourselves and it would not be appropriate for it to be shared with us. We are there as a shareholder. The FSA is approaching it as a regulator. We are trying to limit the amount of inside information that we have on the banks because our fundamental mission is to dispose and we have a very different role.

  Q74  Mr Todd: If you had been the purchaser of this bank, you would undoubtedly have gone through a due diligence exercise to examine their asset book, would you not?

  Mr Kingman: Yes.

  Q75  Mr Todd: And yet, because you have ended up as the owner of this bank through their own fault, you have taken a self-denying ordinance that you should not know anything about the quality of the assets that you now own.

  Mr Kingman: To be clear, the government, the Treasury, has full access to all of the FSA's analysis and has the very important responsibility of managing the asset protection scheme, which is essentially an insurance scheme on all the bad assets—

  Q76  Mr Todd: I understand that. You are drawing a distinction between the Treasury and the ultimate owner on the part of the taxpayer and you as their agent in this matter?

  Mr Kingman: Yes, correct.

  Q77  Mr Todd: Do you not feel that your behaviour as the agent in controlling the government's stake in this company would be altered in any way by knowledge of the asset book that the company had?

  Mr Kingman: I do not believe so.

  Mr Crompton: Not in terms of the way our shareholder relationship works, no.

  Q78  Mr Todd: It might alter the way in which you dealt with risk, which is one of the areas you, Mr Kingman, have rightly stressed an engagement in.

  Mr Kingman: To be clear, we talk to the Treasury a huge amount, of course. What we do not need to do our job is asset line by asset line understanding of this bad loan at RBS. The FSA does need to understand that and the Treasury needs to understand that but it is not something that we need to understand. It is something that conceivably could get in the way of our disposal.

  Q79  Mr Todd: It would be useful to have discovered that. On the engagement with minority shareholders in RBS, effectively you are the controlling shareholder in Lloyds. How is your relationship with other shareholders in Lloyds functioning so that you act appropriately in coordination with best practice on shareholder engagement in these two companies?

  Mr Crompton: First of all, I would say it functions very well. We have a candid relationship with the major shareholders in both of these banks. We also have quite a lot of meetings with potential future shareholders in these banks as well. The principles under which we act and the conversations we have are clearly principles where we are absolutely discussing public information, not any non-public information which we might happen to have at any point in time.

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Prepared 27 November 2009