Memorandum from Michael McQuade
1.1. I am more than happy that any information
or opinions that I give in this submission remain in the public
domain however I would ask that my personal contact details should
not be published and should remain confidential as I have no wish
to be inundated with spam emails or unsolicited telephone calls.
2. ABOUT MICHAEL
2.1 I am a retired bank manager. In 1964
I joined the Leicester Trustee Savings Bank and in 1975 I was
appointed manager of the TSB in Lutterworth, Leicestershire. At
that time I was the youngest appointed lending manager. (TSB had
just begun to lend to its customers). During my career I managed
a number of branches then was appointed to an Area role. When
I was forced into early retirement in 2001, by Lloyds TSB Bank
plc, I was working on various projects including Complaint Handling
and Telephony. I was a Director of the Lloyds TSB No 2 Pension
Fund. During my time at the bank I achieved a number of notable
2.1.1 I saved the bank £6 million per
year (every year) in cash management;
2.1.2 I saved the bank from being fined
by the FSA for untimely management of investment proposals;
2.1.3 I lent more money on mortgage from
my branch in Leicestershire than the whole of the other branches
in the County put together;
2.1.4 My bad debt record was exemplary;
2.1.5 I wrote the chapter in the Bank Lending
Manual that dealt with Overdraft Reviews;
2.1.6 I designed an Objective Based Appraisal
System used to support Performance Related Pay and introduced
it across the TSB national branch network; and
2.1.7 I was the first branch manager to
sell £1 million of life insurance cover.
3. SUMMARY OF
I would like the Committee to consider my views
Professionalism in banking.
Historic regulation in the mortgage
Effects of de-regulation.
TSB and Building Societies as Public
3.1 Professionalism in banking
3.1.1 When I started my career in banking
it was made clear to me that if I expected to progress toward
an appointment then the minimum standard that I would need to
achieve was to become an Associate of the Institute of Bankers,
now the Chartered Institute of Bankers. I studied General Principles
of Law including, sources of law, contract and tort. I studied
Principles of Accounting so that I could understand company accounts,
total and marginal costing, budgetary control and investment appraisal.
3.1.2 Today bank staff are encouraged to
study for the Financial Planning Certificate to enable them to
sell insurance products. Bank staff are encouraged to be licensed
to sell home insurance, car insurance, mortgages, life insurance
and pensions. Professional banking qualifications are very low
on the priority list. Proof? Ask the Chartered Institute of Bankers
for the statistics of UK "ACIB" award made over the
last 25 years and look at the trend line.
3.1.3 We cannot expect our front line banking
staff to offer professional advice to help customers manage their
business and personal finances when they have a sales biased education
and the focus of bank "Customer Service" is based upon
selling bank products.
3.2 The Page Report
3.2.1 Around 1976 a government commission
looked into the future of the TSB and banking in Great Britain.
The findings were published as The Page Report. This report
(1) The joint stock banks, then the Big 5, Barclays,
National Provincial, Westminster, Lloyds and Midland should concentrate
on serving the commercial customer.
(2) The TSB should be developed to service the
banking needs of the general public.
(3) The Post Office Savings Bank should be developed
to service the personal banking needs of those people who lived
in areas where it was uneconomic for banks to operate.
3.2.2 The report was ignored.
3.2.3 The bank branch network has been destroyed,
profit before service left many without easy access to personal
3.3 Historic regulation in the mortgage market
3.3.1 In 1973 I bought my first house, a
terraced house in Leicester. To obtain a mortgage I had to have
saved regularly with a building society and built up a deposit
in my account.
3.3.2 Saving regularly had two purposes,
(1) to build the deposit and (2) to prove to the building society
that I could regularly put on one side a sum of money and still
maintain a standard of living.
3.3.3 In 1973 only building societies were
allowed to lend money over 25 years for house purchase. Bank lending
did not extend beyond 10 years and the rates charged were significantly
higher than those charged by building societies.
3.3.4 Tax relief was available on building
society mortgage interest.
3.3.5 Building society mortgages were only
available for the purchase of the borrower's principle place of
3.3.6 Building society mortgages were not
available for the purchase of second homes or houses in the rental
3.3.7 Building society mortgages were in
short supply and prospective borrowers often had to wait their
3.3.8 The buying of houses to rent was considered
a business enterprise and borrowers were directed to the banks
for a commercial loan. Bankers in those days considered lending
in proportion to the borrowers stake in the enterprise. Buying
houses to rent required the borrower to use their own money and
the bank lent in multiples of the borrowers stake, double nothing
was nothing! The bank held the deeds as security. The loan to
value ratio never went above 70% of the value of the property
and this valuation was taken not on the open market freehold value
but on a 7-10 year return on rent. The repayment period rarely
reached 10 years.
3.3.9 In every case where I lent money to
a customer I always looked for two things, an intention to repay
and an ability to repay. The first I covered by looking at the
borrowers banking history and checking with a credit reference
agency and the second I covered by completing an income and expenditure
account. If the borrower proposed to take on the commitment to
repay a given sum each month and he or she had not been saving
that same sum over at least the previous six months, where was
the repayment coming from? What was to be given up? Was that reasonable?
Following these principles my lending was sound but more importantly
my customers never entered into commitments that they could not
3.4 Effects of de-regulation
3.4.1 During the 1980's the government of
the day pursued a policy of a free market economy. De-regulate
the market place and allow competition to drive out inefficiencies
and allow the market to find its own level.
3.4.2 Building societies were allowed to
borrow money from the wholesale market and make it available for
mortgage borrowers. Borrow short and lend long! Not a sound business
philosophy, totally dependent upon the continuing supply of short
term wholesale funds. The experience of 2007 proves this point.
3.4.3 Banks were allowed to lend money for
house purchase on mortgage loans over 25 years.
3.4.4 The sudden free availability of mortgage
funds across the market place initiated the housing boom. With
freely available funds and more buyers in the market competing
for a limited supply of houses the market responded like any other
market, the price went up. This deregulation of mortgage lending
was a major cause of the boom in property prices in the last quarter
of the last century.
3.4.5 With building societies having endless
capital to lend and the banks entering the market bringing their
massive lending capacity, there were insufficient borrowers able
to take up the supply of money to buy principal places of residence.
The banks and building societies had to become inventive in lending.
Lending on house purchase was seen as low risk, "Safe as
3.4.6 Tax relief on mortgage interest is
3.4.7 The effect of tax relief being withdrawn
and the inexhaustible supply of money meant that the loan purpose
was no longer restricted to buying the borrowers principle place
of residence. Banks and building societies fell over themselves
to refinance each others mortgage lending to provide the borrower
with fund to buy anything. One recent TV advert showed an obese
couple sitting on a sofa saying that XYZ Finance Company made
it very easy for them to refinance their mortgage over 300 easy
monthly payments so that they could have a new kitchen and there
was enough money left over to go on holiday. This couple had borrowed
money for a two week holiday and were paying for it over 25 years!
3.4.8 Deregulating the finance market gave
rise to lenders advertising to encourage the general public to
"free the equity in your home". Again, questionable.
Equity was not freed from the home, the home remained exactly
as before, the borrower was encouraged to become deeper in debt.
3.4.9 Excess funds to lend, a booming property
market and minimal regulation led the mortgage lenders to offer
"non-status" mortgages. Instead of the lender confirming
the income of the borrower and lending in proportion to it, the
prospective borrower simply stated the amount of money he or she
earned and in exchange for paying a higher interest rate the stated
income was taken on face value and not confirmed. Some borrowers
borrowed more than they could sensibly afford to repay which was
fine while both parties were fully employed but became impossible
when incomes reduced for whatever reason.
3.4.10 Not satisfied with offering "non-status"
mortgages, lenders now moved to 100% mortgage loans and these
loans even covered carpets, white goods installed by builders
and also included stamp duty and solicitors fees! 100% lending
meant borrowers had no commitment of their own and hence nothing
to protect when the times became difficult.
3.4.11 Non-status mortgages and the booming
property appealed to greed. Greedy borrowers philosophy was to
borrow maximum today, fund repayments from capital and either
relax when real earnings caught up or else sell after a couple
of years and pocket the property capital appreciation.
3.4.12 Deregulation opened up buy to rent
propositions. Buy a house and rent it out. The rent covers the
mortgage payment and the borrower uses the capital appreciation
to support further borrowing to buy more houses to rent. The effect
of this deregulation in university towns is that low priced housing
is snapped up by buy to rent landlords leaving first time buyers
priced out of the market.
3.5 The mortgage borrower
3.5.1 Sadly we live in a consumer led society.
The government today is actively promoting initiatives to try
to stimulate the retail economy. Consumers are encouraged to consume
and not to save. The general public want everything today and
are not content to wait and improve their standards of living
3.5.2 In 1973 I bought my first house, a
terraced property. At that time my expectation was to progress
in my job to the point that I could afford to move to a semi-detached
property and then when my career developed to move to a detached
property. We started with hand-me-down furniture. We used the
local launderette to wash our clothes. Today instead of waiting
until we can afford improvements in our life style, they are bought
on credit. There is no recognition of financial management failure
when mortgages are refinanced to provide money to purchase cars
3.5.3 The general public want all of the
materialistic things that a retail economy has to offer. Lenders
have had too much money to lend and any lender who adopts a regulatory
or controlling policy like confirming income or completing income
and expenditure forms will soon lose lending to a competitor.
In any event in a booming economy what losses do occur are more
than covered by the profits from new business growth. That is,
until there is no new business growth.
3.5.4 Most members of the general public
have never had lessons in financial management. School children
are not interested in budgeting to pay the electricity bill or
the mortgage. These things are not real in their lives. My children
never turned off lights or ate the last slice of bread in the
old loaf until they started to pay the bill. The general public
will not, of their own volition draw up family budgets, they need
stimulation at appropriate times to recognise the importance of
3.5.5 More people respond to greed than
to need, indeed many salesmen's sales pitch appeals to greed and
ignores need. Lenders and deregulation have done nothing to reverse
this trend. Lenders have actively appealed to greed to encourage
borrowers to remortgage their homes and buy consumer goods that
they do not need. I have need of a television set, my need is
satisfied by my existing set, it is a few years old and is digital.
However, I am bombarded daily with advertising coaxing me to buy
a 42 inch plasma home theatre. Why? I do not need one and I cannot
afford to buy one but if I borrowed on my credit card, loan or
mortgage I could have it today.
3.5.6 We are all naturally greedy people,
some of us have self discipline, others, however, need help.
3.5.7 Last year, post nationalisation, Northern
Rock Building Society was criticised for over zealous repossession.
A borrower was shown on television standing outside his home,
that had just been repossessed. He was lamenting that he had lived
there for over 30 years and now it was gone. How could that be
if he had bought the house on a mortgage over 25 years? Clearly
this man had remortgaged his home to yield money to spend on things
other than his home. Who was to blame?
4. TSB AND BUILDING
4.1 In the 80's the free market was everything.
The Page Report had been rejected and the government was on a
path to privatisation. The Trustee Savings bank was an anomaly,
nobody owned it. The government wanted to see it privatised and
eventually the courts approved.
4.2 At floatation the Bank was worth £865
million. Floatation raised £1,000 million and the whole of
the share capital came back to the Bank. TSB Bank plc was worth
£1,865 million on Day 1 and it had £1,000 million in
cash in its bank and no concrete plans to spend it.
4.3. Floatation may or may not have been
a good idea but the reality of the situation was that TSB management
were steeped in TSB culture and background. They were not hard
faced commercial businessmen who had built successful business
in a challenging market place. Prior to floatation TSB was limited
in its activities by acts of parliament and its future was guaranteed
by the Treasury/National Debt Office.
4.4 In British economic history here had
never been, nor has been since, a company that had £1,000
million cash to spend/invest. This frightening situation was made
worse by the Company not having grown this nest egg from its successful
trading activities but by its being given it almost as a windfall
on a plate. The frightening situation was made terrifying by the
fact that the purse strings were in the hands of inexperienced
4.5 TSB bought Hill Samuel Bank for a price
agreed before Black Monday. Following stock market collapse on
Black Monday the valuation of Hill Samuel fell but TSB went ahead
and bought Hill Samuel at the pre collapse price. The Bank then
expanded its commercial lending book and suffered great losses.
4.6 Within a few short years TSB had lost
4.7 The TSB failure was not unique. Building
societies rushed to privatisation as did the nationalised industries.
In all cases management of these organisations was swept along
by "group think", the euphoria of the 80's of deregulation
and open market freedoms. No thought was given to expertise to
manage these new privatised companies. Is it any wonder that so
many of the companies floated in the 80's have been taken over
by other businesses?
4.8 When Peter Burt was Chief General Manager
of Bank of Scotland, he had five criteria to be considered before
taking over another business:
1. Will it prejudice the continued independence/existence
of the Bank?
2. Is it "community type" banking?
That is, inside existing skill capabilities.
3. Does it have a worthwhile share of a
4. What can we bring to the party in terms
of competitive advantage?
5. Does it make economic sense? We have
long pockets but very short arms!
The second part of point 2 and the whole of
point 4 are absolutely essential. In the case of TSB, managing
a public limited company worth nearly £2 million was outside
the skills of the TSB Board and senior management team. Investing
£1,000 million safely was clearly beyond their capability.
They would have been better to have invested in a Post Office
Clearly Bank of Scotland failed on Point 4,
they had no capability to manage Halifax Building Society. BOS
did not have a highly successful mortgage operation, the management
of Halifax Building Society had managed to steer the privatised
bank into difficulty that required the BOS intervention and BOS
had nothing to bring to the party to shift the culture. Without
a shift in culture more of the same will bring about more of the
4.9 Abbey National and Alliance and Leicester
have both suffered from enthusiastic building society managers
who do not have the experience to run multi million pound companies.
5.1 Reregulate Mortgage Lending
5.1.1 As soon as possible introduce legislation
to regulate lending. The maximum period of borrowing should be
limited to the life of the asset bought, eg house = 25 years,
new car = 5 years, holiday = 1 year.
5.1.2 Limit mortgage lending to provide
funds for house purchase only.
5.1.3 Require borrowers to save deposits.
5.1.4 Set maximum loan to value limits,
5.1.5 Prohibit "non-status" mortgages.
Require all income to be confirmed.
5.1.6 Encourage responsible lending which
includes confirming that the borrower can actually afford the
5.1.7 Shorten the loan periods for buy to
rent properties to 10 years.
5.1.8 The effect of the above limitations
will, (a) limit the number of new mortgages, (b) keep house prices
in check and affordable to first time buyers, (c) encourage prospective
home owners to save, (d) give homeowners equity to protect when
times get tough, (e) prevent the over enthusiastic from living
beyond their means.
5.1.9 Whatever new initiatives are introduced
into the market place care must be taken not to allow freely available
funds to drive up house prices.
5.2 Reward Saving
5.2.1 If prospective home owners are to
qualify for a mortgage they must save their deposit and their
purchase costs. Qualifying schemes should be made available to
savers to encourage them to save.
5.3 Shared Ownership Housing
5.3.1 Encourage home ownership through shared
ownership schemes. Government funds, or carefully controlled PFI
funds, should be made available to Housing Associations or appropriately
authorised/controlled lenders, to allow them to participate in
shared ownership of properties on the open market. Provided that
the homeowner has a stake in the property he has something to
protect. The homeowner should be responsible for the maintenance
of the property and sensible arrangements made at outset to clarify
how the homeowner buys an increasing share in the property.
5.4 Scrutinise Merger Propositions
5.4.1 When financial institution propose
to merge or take over others, they ought to be required to address
Peter Burt's five criteria.
5.4.2 In answer to the questions at 6.4.1
above the reviewing panel ought to ask my generation of lending
banker's two favourite questions, "How do you know that?"
and "What if..?"
6. WHO PAYS
6.1 Every decision ever made has a price
to pay. The price may simply be the opportunity cost of the decision
or it may be as drastic as life or death.
6.2 When lenders lend recklessly?
6.2.1 The first person to pay is often the
borrower. He lands in debt that he cannot afford. Irrespective
of who ought to take responsibility, the borrower generally loses.
6.2.2 The family of the borrower. It is
hardly the children's fault when the family home is repossessed.
6.2.3 The shareholder of the lending company.
As a shareholder either directly or via a pension fund, bad debts
lead to lower profits which lead to lower dividends and lower
share valuations. Mr General Public has absolutely no power through
his or her share voting rights to moderate the behaviour of companies.
It is a myth to suggest that ordinary shareholders have influence.
That is not true, only the big investment funds and city analysts
have the ability to persuade.
6.3 When the Board/Senior Management make
6.3.1 The first people to pay are the employees
at the sharp end of the business, jobs disappear, people are made
redundant. The senior managers who made the bad decisions are
often protected with contacts that have to be bought out, they
are often rewarded by huge lump sum payments to vacate their chairs.
Junior staff who have performed exactly as required and who did
not make mistakes in their jobs have little or no protection.
6.3.2 The shareholder, bad decisions lead
to lower profits which lead to lower dividends and lower share
valuations. Again Mr General Public has absolutely no power through
his or her share voting rights to moderate the behaviour of companies.
6.4.1 There is some mythical view postulated
that shareholders are rich people. This cannot be further from
the truth. Most shareholders are not rich. Most shareholders do
not own shares in their own names. Most people are shareholders
through their pension funds or through their life insurance policies.
6.4.2 By and large, young people do not
invest directly in shares, it is the middle aged and elderly who's
children have grown up and have an eye to their retirement who
invest in shares many through personal pensions or unit trusts.
6.4.3 All shareholders, whether direct or
indirect have paid a very heavy price due to the banking crisis.
Many people have seen their wealth and their dividend income disappear
through absolutely no fault of their own. It is unreasonable that
the government should now expect them to suffer further.
6.4.4 All reasonable effort should be given
to limit any bonus payment given to any group of employees simply
for doing their job. That is what salaries and wages are for.
Bonuses should only be paid for exceptional achievement and should
only be paid from the profits generated by the exceptional achievement.
Reward success not failure.
6.4.5 I believe that it is unreasonable
for government to prohibit banks, who have borrowed from government,
from paying a dividend. Direct shareholders often live on those
dividends and pension companies need dividends to pay pensions.
There has to be a better way than penalising the shareholder for
the errors of those protected.
11 February 2009