Examination of Witnesses (Questions 60-79)
SIR DAVID
COOKSEY, MR
JOHN KINGMAN,
MR KEITH
MORGAN AND
MR JOHN
CROMPTON
4 NOVEMBER 2009
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.
| 
