UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 144-xii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

 

 

BANKING CRISIS

 

 

Tuesday 17 MARCH 2009

LORD MYNERS CBE, MS MRIDUL HEGDE and MR NIKHIL RATHI

 

 

Evidence heard in Public Questions 2656 - 2798

 

 

USE OF THE TRANSCRIPT

1.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

 

2.

Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

 

3.

Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.

 

4.

Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

 

5.

Transcribed by the Official Shorthand Writers to the Houses of Parliament:

W B Gurney & Sons LLP, Hope House, 45 Great Peter Street, London, SW1P 3LT

Telephone Number: 020 7233 1935

 


Oral Evidence

Taken before the Treasury Committee

on Tuesday 17 March 2009

Members present

John McFall, in the Chair

Nick Ainger

Mr Graham Brady

Mr Colin Breed

Jim Cousins

Mr Michael Fallon

Ms Sally Keeble

Mr Andrew Love

John Mann

Mr George Mudie

Mr Mark Todd

Mr Andrew Tyrie

Sir Peter Viggers

________________

Witnesses: Lord Myners CBE, a Member of the House of Lords, Financial Services Secretary to the Treasury, Ms Mridul Hegde, Director of Financial Services, and Mr Nikhil Rathi, Team Leader, Financial Stability Team, HM Treasury, gave evidence.

Q2656 Chairman: Lord Myners, welcome to the Banking Crisis Inquiry of the Treasury Committee. Can you introduce yourself and your colleagues for the shorthand writer, please?

Lord Myners: Good morning, Chairman. I am Paul Myners and I am Financial Services Secretary to the Treasury. On my right is Mridul Hegde from the Treasury and on my left is Nikhil Rathi from the Treasury.

Q2657 Chairman: Good morning. The Financial Services Secretary post is a new post. What is distinctive about that post? Why did it need to be established?

Lord Myners: I think it is a new post in the sense that it was an additional office created in the Treasury, although many of the functions for which I am responsible were previously carried out by other Ministers; before me by Kitty Ussher, and before her by Ed Balls. I think the increased demands on the financial services side of the Treasury, particularly as a consequence of the difficulties being experienced in the financial sector, persuaded the Prime Minister and the Chancellor that they wanted to create an additional ministerial position.

Q2658 Chairman: Lord Turner has stated to us in the Committee that the FSA is not yet fit for purpose. When do you think it will be fit for purpose and what process has it to undergo to achieve that aim?

Lord Myners: Like members of the Committee I am sure, I am looking forward to Lord Turner's review, which will be published later this week. I think it will be a very thorough piece of work which will look at issues around the monitoring of capital and liquidity, behaviours, supervision, accounting, and the nexus between boards and management and shareholders. This also will fit neatly with the work which we are expecting Sir David Walker to do in his review of bank governance. How long will it take? I think we must wait to see what Lord Turner says and the debates that follow that. As the Prime Minister has said, the complexity of financial services has increased quite significantly over the last ten years and it is possible that global regulation failed to keep up with the pace of innovation in the financial sector.

Q2659 Chairman: The issue of Sir Fred Goodwin's pension has obviously been a big issue over the past few weeks and you would be surprised if we did not ask you about it this morning. You come as a pension fund manager from the aggressive and unsentimental environment of the City where detail is king. Is it not the case that you have dropped the ball here; that detail is king and you have not looked at it, and you were either negligent or you were misled, it can only be one or the other?

Lord Myners: Mr Fallon offered me the choice of choosing between a nod and wink with another banker or negligence. I plead guilty to neither. I am grateful to the Committee for the opportunity to set out what I know about RBS's decision in respect of Sir Fred Goodwin's pension. By way of background, during the weekend of 11 and 12 October, I was heavily engaged in the task of supporting a number of major UK financial institutions which were essential to the financial stability of the UK economy. These meetings were at the Treasury and they took place round the clock, from the Friday evening through to the early hours of the Monday morning. It was in this context that I met with representatives of RBS on the evening of Saturday 11 October. I was informed that the directors had already decided on the previous day to replace Sir Fred Goodwin as Chief Executive; in their own words "he needed to go." The following evening I was telephoned by a director of RBS, Mr Robert Scott, and during the course of that conversation was told of the then estimated transfer value of Sir Fred Goodwin's pension. At no stage prior to February of this year was I, or anyone else in the Government, as far as I know, made aware that in the process of replacing Sir Fred Goodwin RBS had exercised a discretion which allowed him to take his full, undiscounted pension from the age of 50 and thereby nearly doubled the value of his pension. Quite the contrary; I was very clear with RBS and with the other banks that I met over the weekend about the principles which the Government expected them to follow in dealing with departing executives. I developed a script for these meetings and I set out these principles in the following terms: there should be no rewards for failure; payments to departing executives should be minimised; and executives should be required to mitigate loss of office costs wherever possible, but we would not expect the banks to abrogate existing contractual commitments. The two directors of the Royal Bank of Scotland with whom I met to have this discussion about Sir Fred Goodwin - that is Sir Tom McKillop and Mr Robert Scott - expressed no issues at all with these principles, although it has subsequently become clear that they were already embarked upon a decision process which was contrary to those principles. It is beyond my comprehension that RBS could have then exercised a discretion that very substantially increased the cost of funding Sir Fred Goodwin's pension. Perhaps I could mention the key terms of RBS's pension scheme, as I understand them. Under the pension scheme, a member of the scheme retiring early at RBS's request - these words being very important - has the right to receive a pension based on accrued service with no discount applied for early retirement. This is set out clearly in the company's Annual Report and Accounts, but this right only applies for someone who is asked to retire and chooses to do so, such a person choosing voluntary redundancy and having the right to make such a choice, that is to say, they could decline the invitation to retire early. It was clear from my understanding of the discussions with RBS, and an examination of RBS papers that I have seen, that the board had reached a view that Sir Fred Goodwin needed to go. There was no question of Sir Fred Goodwin being able to decline the offer of early retirement and, as such, I do not think it met the tests that the scheme set. Someone who leaves the company without having an option to stay is not automatically entitled to his pension treatment. Sir Fred Goodwin did not have the option of staying. The board had decided that he must go. Someone within RBS took the decision to treat him more favourably than required. This decision is completely at odds with the principles that the Government made clear to RBS and expected them to follow. I believe that the role of government as a prospective shareholder and provider of financial support was to make clear the principles it expected to be followed in respect of remuneration. This is the same approach that other engaged and informed institutional shareholders would take in similar circumstances. When directors fail to act in the interests of shareholders they should be held to account. It is not the job of the government minister to negotiate or settle the details of individual transactions that the banks enter into, including termination arrangements for departing executives. I did not negotiate, settle or approve Sir Fred Goodwin's departure terms. All these issues were handled by RBS. The new board of RBS, like the Government, is very concerned to understand how people within the company could have made this quite extraordinary decision, clearly at odds with the principles that the Government had laid out, and exactly who made that decision, a decision which was also clearly contrary to the terms of reference of the remuneration committee of the Royal Bank of Scotland. This is now a matter of legal investigation which is being carried out under the guidance of the new Chairman of the Royal Bank of Scotland, Sir Philip Hampton. Members of the Committee will appreciate, no doubt, that there are limits to what I can say further given the fact that there is the possibility of legal action being taken. I am grateful to you, Chairman, for allowing me to make rather a full statement, but I felt that it might set the context and then provide the Committee with a good opportunity to cross-examine me on what I have said.

Q2660 Chairman: In continuing our inquiry into the banking crisis we are going to be looking at the role of non-executives in our consumer confidence focus and we will be having them back on that. You mentioned the issue of principles. Outlining general principles is not the same as engaging in proper checks as to what is going on. Did you demand to see the relevant documentation? If not, why not?

Lord Myners: I think, Chairman, in the context of the negotiations which were taking place with eight major financial institutions throughout that long weekend, which led to a commitment in principle of up to 50 billion of equity capital support, a direct commitment of 37 billion, plus the launch of a new, complex, innovative Credit Guarantee Scheme of 250 billion, and an extended Special Liquidity Scheme, there was a limit to how much we could do, but, quite clearly, this was a responsibility that the directors of the Royal Bank of Scotland owed to all shareholders. The responsibility of directors under company law is very clear as to the members of the company current and prospective, and this was a duty which fell to the board of the Royal Bank of Scotland, as they clearly understood themselves in their terms of reference, and yet in their papers to the nominations committee, which you have seen, the remuneration committee and the Chairman's committee, they consistently misdirected themselves in saying that Sir Fred's pension reflected his contractual entitlement. It simply did not reflect his contractual entitlement, only the interpretation that they had allowed to be placed upon it by virtue of the fact that they had requested that he retire rather than required that he retire, which was clearly, in my view, what they had actually done. In order that he could get a better pension, they had framed this in terms of a request, but I repeat my view that it was a request which clearly Sir Fred was not going to be able to decline. May I also add that they were advised very seriously by Watson Wyatt, a reputable firm in this area, that this would have adverse consequences and their shareholders would not approve of this decision. That said, the board still continued with their actions. I think it is the board to whom these questions should be directed, not a Minister.

Q2661 Mr Fallon: But you were the Minister responsible and what you have not told the Committee this morning is what you told the House of Lords on 5 March, namely: "I discussed Sir Fred Goodwin's pension on the evening of Saturday 11 October." What was there to discuss about his pension?

Lord Myners: In expanding upon the principles and in my discussions with Sir Tom McKillop and Mr Bob Scott, I talked about a number of aspects of the arrangements for Sir Fred's departure. In respect of the pension, Mr Scott said, "The pension will be enormous; you know that", and I acknowledged that because Sir Fred had been an extremely well-paid person. He had been paid 11 million over the previous three years. What I was not told was that Sir Fred's pension was in the course of being doubled in value by the members of the remuneration committee. In challenging Mr Scott, who was the most active member in these discussions, about the need to ensure that failure was not rewarded - and let us be clear, this bank had seriously failed, this bank, as we now know, had lost close on 30 billion - I challenged Mr Scott on this issue, and he was very clear, and I remember the words well, as indeed does the partner from Slaughter & May who was present, that Sir Fred Goodwin is a man who absolutely insists upon his contractual entitlement, and his pension was a matter of contract. As I said earlier, I did not believe that we could abrogate contract. What was clear with hindsight, Mr Fallon, is that I was not told the full story.

Chairman: We have half a dozen members wanting to come in on questions, so if you can give us some shorter answers it will help.

Q2662 Mr Fallon: Sir Fred Goodwin in his letter said that you indicated you were aware of his entitlement. Were you aware of the RBS pension fund rule that allowed any member retiring early at the request of the company to receive a pension without any discount for early retirement?

Lord Myners: The RBS pension fund rules run to over 200 pages. I had not studied the full document.

Q2663 Mr Fallon: But the rule is specified in RBS's Annual Report, I have it here at page 109, which is the last Annual Report available to you.

Lord Myners: I do not think that is actually a rule of the pension scheme, Mr Fallon.

Q2664 Mr Fallon: I will quote it to you Lord Myners: "The RBS fund rules allow all members who retire early at the request of their employer to receive a pension with no discount applied for early retirement." That is in the Annual Report. Were you aware of that?

Lord Myners: I was not aware of that at the time.

Q2665 Mr Fallon: Why were you not aware of that?

Lord Myners: Because of the situation which we were handling when there was a global financial crisis which was bearing down heavily on UK banks, and on which we were taking steps to ensure that the banking system was in a position to operate effectively on the Monday morning. I think, more importantly, Mr Fallon, the situation of Sir Fred Goodwin did not fulfil the condition of that rule. He was not requested to retire in the sense in which lawyers approach this, and there is case law to support this whereby a request can only be defined as qualifying as a request if there is an option to decline the request. There was clearly no such option so it did not fulfil the wording which you are reading to me. I apologise for giving long answers; I will try to be briefer.

Q2666 Mr Fallon: Are you aware that RBS's evidence to this Committee on 2 March said the decision was taken the previous day. They decided this would best be accomplished by treating Sir Fred Goodwin as leaving at the request of the company and not being dismissed. That decision had been taken the previous day.

Lord Myners: And Sir Tom McKillop advised me ---

Q2667 Mr Fallon: So you knew that?

Lord Myners: Yes I did, I have been very clear.

Q2668 Mr Fallon: You knew that he was leaving at the request of the company?

Lord Myners: I knew that he was leaving.

Q2669 Mr Fallon: But this says he was leaving at the request of the company.

Lord Myners: I knew that he was leaving. I did not know the basis on which he was leaving.

Q2670 Mr Fallon: You did not ask?

Lord Myners: Sir Tom McKillop told me that the board had decided, or more precisely the non-executive directors of either the nominations or the governance committee had by a telephone call on the previous day decided that there needed to be a change.

Q2671 Mr Fallon: So you did not ask. You have been a director of many companies. You have served on remuneration committees. In fact, you were on the NatWest board when Sir Derek Wanless was pushed out as Chief Executive with an early retirement package of around 3 million, which has become known in the City ever since as "doing a Wanless". I put it to you that either you were party to some very expensive piece of back-scratching and it was only later when the Prime Minister found out about it that you pretended that you had not approved the full details, or you simply failed in your duty to protect the taxpayer and you allowed Sir Fred to walk away with a pension of 700,000 a year for life. Which is it?

Lord Myners: It is neither. The decision on the pension was made by the board or directors of the Royal Bank of Scotland. I made no decision; my approval was not sought; I was given no information; I sought no information. What I did do, Mr Fallon, was to set out very clearly the principles. Those principles accorded closely with the policies of the Royal Bank of Scotland and indeed accorded with the principles set out by agencies such as the Association of British Insurers. No rewards for failure; minimise the cost of departure; mitigate against any costs that can be avoided; but do not abrogate legal requirements.

Q2672 Sir Peter Viggers: Is it normal for Ministers from the Treasury to go to meetings without the accompaniment of a civil servant to record the events and to avoid uncertainty?

Lord Myners: Sir Peter, if I can try to give you a picture of what ---

Q2673 Sir Peter Viggers: It is yes or no really, is it not?

Lord Myners: I am a relatively new Minister but what I did do was to take advice from officials, and we concluded that the sensitive nature of the discussions that I was going to have with Sir Tom McKillop and Mr Scott, and with Lord Stevenson and Mr Andy Hornby of HBOS, were best conducted not in the large meetings which we were having with the banks, in which there might have been as many as 20 or 25 people, but in smaller groups. In consultation with officials, we agreed that I should be accompanied at those meetings by a lawyer from Slaughter & May to maintain a note.

Q2674 Sir Peter Viggers: Did that lawyer know that your guiding principle was that there should be not rewards for failure?

Lord Myners: Yes, we agreed that before the meeting.

Q2675 Sir Peter Viggers: So why did he not alert you to the fact that the package which was being proposed was going beyond his contractual entitlement? Can you not simply take Fred Goodwin's pension out of Slaughter & May's indemnity policy?

Lord Myners: The responsibility for fully informing me on these matters lay with Sir Tom McKillop and Mr Bob Scott. They were the only people who knew the thinking of the remuneration committee, or members of that committee, at the Royal Bank of Scotland. The lawyer from Slaughter & May was acting on behalf of the Treasury, not acting on behalf of the Royal Bank of Scotland.

Q2676 Sir Peter Viggers: If he knew that there were to be no rewards for failure, what was he doing?

Lord Myners: He knew that there would be no rewards for failure and, furthermore, he heard me very clearly state in both my meetings with HBOS and the Royal Bank of Scotland that that was the case, Sir Peter, and he noted that no dissent was raised, nothing was said at that meeting by either Sir Tom McKillop or by Mr Scott along the lines of, "Well, actually, Minister, what we are minded to do is be rather generous to Fred because he has served us well, and we would like to double the value of his pension, as a result of which we are going to create an elaborate ruse under which it appears that he is requested to retire, and he accepts that request." That was not explained to me. It was clear from the instructions that had been given to Linklaters on the Saturday afternoon to draft his compromise agreement that a decision along those lines had been reached because earlier in the morning on the Saturday the compromise agreement drafted by Linklaters had assumed that Sir Fred would not take his pension until the age of 60. That was changed at some point on the Saturday morning, under instruction, I believe, from Mr Roden and Miss Sloan of the Royal Bank, who were taking instructions from Sir Tom McKillop and Bob Scott. They were the people who made the decisions, not the lawyer from Slaughter & May and not myself.

Q2677 Sir Peter Viggers: Any lawyer, whether or not from Slaughter & May, must have been present at the meeting to advise you on the law, and clearly they failed.

Lord Myners: No, quite the contrary, we were talking about the principles on which executives would depart. We were not talking about the details of individual contracts. That is a matter under company law for the directors of the company.

Q2678 Mr Mudie: I do not think you can have it both ways, Lord Myners. You have just finished up talking about company law. In line with the Government, you set out the principle of no reward for failure, but you did interfere in the discussions because in early November you went back and dealt with a share option, so you did actually negotiate and you did settle things. I can understand the busy weekend and the huge decisions that you had to take, but you did slip up by not asking some questions about the pension when you saw the amount of it.

Lord Myners: Mr Mudie, with all respect, I do not think I slipped up.

Q2679 Mr Mudie: That usually means "with no respect"!

Lord Myners: No, with considerable respect for you and the Committee. I have watched this Committee at work over many years. I have contributed written evidence to this Committee and I believe, without sounding sycophantic, that you have done much good work in terms of exposing some quite complex and tricky issues, and we have benefited from your work, so I say that with all sincerity and candour. I do not think that I slipped up. I think the right approach was one based around principles. Indeed, that is what the Combined Code and the report of Sir Derek Higgs expects shareholders to do.

Q2680 Mr Mudie: Shareholders were not involved here or, rather, you were the representative of the shareholders in terms of the Government. We were putting billions in. You were told that this was an exceptional pension. Bob Scott told you. I can understand that you were preoccupied with the bigger picture, but you cannot then take refuge and say that you did not negotiate, it is was not your decision. You were there as a Minister to make sure that there was no reward for failure. Fred Goodwin walked away with a pension that was almost doubled, so he was rewarded for failure, and you are the individual, you are the Minister who handled that business. If you said that you were pre-occupied by the bigger picture, people would understand, but you cannot say it was nothing to do with you. You set the parameters; you actually interfered in the details. You have conceded that, you have accepted that. Why can you not accept that you slipped up?

Lord Myners: I set very clear parameters and principles, which I believe was the right approach to adopt. In November, in the course of reviewing the draft listing particulars in connection with the offer of securities to the Government, it became clear that the board of the Royal Bank of Scotland had allowed Sir Fred to retain certain share options. When my attention was drawn to this, I think I telephoned Mr Scott and said I thought this was not consistent with the principles.

Q2681 Mr Mudie: Why did you do not that with the pension?

Lord Myners: Because the pension was not disclosed at that time.

Q2682 Mr Mudie: Let me ask you finally ---

Lord Myners: The pension was not disclosed, Mr Mudie, until February.

Q2683 Mr Mudie: It is almost like the Chancellor slipping up over the Budget over an individual thing and saying, "I was preoccupied by the bigger picture." You cannot get away with that. Just let me ask you: with hindsight, would you have referred this pension to your officials to look at in view of the huge amount? I can forgive someone for making a mistake; I cannot forgive anybody for not learning from a mistake. In hindsight, would you have asked, as I would have expected a busy Minister to do in the middle of negotiations, "Somebody better look at this"?

Lord Myners: I am afraid that Mandy Rice-Davies would probably anticipate my answer, but I have looked very carefully in my own mind about this issue, Mr Mudie. I have asked myself, as I think many of us would do, did I do something wrong, should I have done something differently in the circumstances. I am not claiming as a defence that I was in some way overworked or pre-occupied by other matters, but I have asked myself should I have done something differently, and I have concluded that it was right to adopt an approach of setting up very clearly with no hesitation and no qualification the principles and then expecting the Royal Bank of Scotland board and the HBOS board to take actions consistent with those principles, or to explain why they were not doing so.

Q2684 Mr Mudie: It is one thing to set principles but it is naive not to check that the principles are adhered to. This is where we are in this banking crisis - light-touch regulation and principles-based - and the reality is if you do not check, people do funny things.

Lord Myners: I think that question, Mr Mudie, should be directed to the directors of the Royal Bank of Scotland. They are the people who are legally responsible to the owners of the business.

Q2685 Nick Ainger: Lord Myners, I think what we would be looking for is some way out of this mess.

Lord Myners: Yes.

Q2686 Nick Ainger: And, as you want to see, and I am sure all members of this Committee want to see, and certainly the British public want to see, that Sir Fred Goodwin pays a substantial part of this pension back because, clearly, he has been rewarded for failure. My calculation is that if he lives until 80 he will receive 21 million. If he had taken his contractual arrangements, he would only have got 9.6 million. Therefore, he has received over 11 million as a reward for failure. Can I take you back to what the remuneration committee did and what its minutes tell us. I have got the minutes here and this was the meeting that started at 5 pm on Sunday 12, and it states: "It was noted that the departure terms which had been considered by the Committee represented Sir Fred Goodwin's contractual entitlement. Mr Roden reported that discussions with Sir Fred Goodwin were on-going and that a compromise agreement was being prepared which stated that the termination date was subject to mutual agreement." Then the resolution of the committee is by the general council and group secretary and directors, Mr Roden be authorised to take whatever actions are required to implement the arrangement for Mr Hester and Sir Fred Goodwin. Therefore the remuneration committee did not agree the package that Sir Fred Goodwin accepted; is that correct?

Lord Myners: I think constitutionally under the terms of reference of the remuneration committee - and Mr Fallon, as chairman of a remuneration committee at Tullett Prebon, will no doubt have insights into this as well - acts as a sub-committee of the board and the full decisions are taken by the board.

Q2687 Nick Ainger: Let us just be clear. From that minute, and I think you have got it in front of you, the remuneration committee did not agree the severance package for Fred Goodwin.

Lord Myners: I believe that this Committee agreed terms that they would recommend to the board and that that decision was taken in the early hours of Monday 13 October.

Q2688 Nick Ainger: But the minute says that: "Mr Roden reported that discussions with Sir Fred were on-going and that a compromise agreement was being prepared."

Lord Myners: I believe that a compromise agreement was handed to Sir Fred Goodwin on the afternoon of Saturday 11 October. These minutes relate to a meeting held on Sunday 12 October. There is an inconsistency between those two dates, and that is one of the areas which I am sure the board of RBS will be investigating.

Q2689 Nick Ainger: Indeed, because further on in Chairman's board meeting, which took place at 1.30 on the morning of Monday 13 October, it says: "Finally, the committee noted that the remuneration arrangements in respect of Mr Hester and Sir Fred's departure had been considered at a meeting of the remuneration committee held on 12 October. The directors approved the arrangement, details of which are contained within the remuneration committee minutes." There are no details in the remuneration committee minutes. Therefore, in your experience, how on earth could that full board come to a decision on Sir Fred's deal?

Lord Myners: Mr Ainger, I do find this extraordinary. If I can stick with the paragraph from which you were quoting which says, "It was noted that the departure terms which had been considered by the committee represented Sir Fred's contractual entitlement." They simply did not reflect his contractual entitlement, and the board was misdirecting itself on that particular point. It is also very clear that there is not a single number in this paper. These directors took their decision on the pension without a single point of data in terms of cost. There is no articulation of the alternatives that the board had. The board clearly had choices. The board could have terminated with cause. The board could have terminated without cause. The board could have terminated with garden leave. The board could have invited Sir Fred Goodwin to retire and give him the option. They constructed this arrangement in accordance with the last of those routes, which was the most generous that they could have done from the perspective of Sir Fred, which led to this quite extraordinary settlement. You will also notice that they give Sir Fred the choice of either taking his full pension at 50 or his full pension at 60. I think one would have to have been a monkey in that situation to have spent a great deal of time deciding on which of those choices to take. It does give an overall picture of a board of directors, or at least some directors, bending over backwards to be generous to Sir Fred. There was a real sense of denial, in my view, about the Royal Bank of Scotland during this period of time. When I had a second meeting with Mr Scott, after my first meeting with Sir Tom McKillop and Mr Scott, Mr Scott was most insistent that if the board insisted on Sir Tom McKillop leaving that the non-executive directors had the previous day agreed that they would all resign in protest because they felt this would have been harsh and outrageous treatment of Sir Tom McKillop. I was dealing with people who, quite frankly, for the first time, in my view, on that evening were realising the serious state of affairs in which this bank had been taken and yet they had already taken decisions in principle to treat Sir Fred Goodwin in a most extraordinary and generous manner. I still hope there is an opportunity for Sir Fred to do the right thing and either return some of his pension or make a very, very substantial and long-term commitment to charity, both of money and of his undoubted energy and resources. Sir Fred can mitigate even at this stage.

Q2690 John Mann: I would not want to risk a charity in my area. How come you kept him on in January?

Lord Myners: Mr Mann, the board of the Royal Bank of Scotland kept him on.

Q2691 John Mann: Did you know that he had been kept on in January?

Lord Myners: I knew because they announced on Monday 13 October that Sir Fred Goodwin would be departing as soon as a new Chief Executive was appointed. At that time Mr Stephen Hester was Chief Executive of British Land and he had to secure his departure from there. The board of the Royal Bank had concluded that Sir Fred's continuing presence was critical over the three-month period, but thereby hangs another tale.

Q2692 John Mann: What had you concluded? Did you believe that his continued presence was a good thing or did you tell them to get rid of him straight away?

Lord Myners: I do not think from the perspective of sitting outside the company it is possible to form a view on the internal dynamic and the roles of the board. I was aware that in Mr Gordon Pell there was an extremely accomplished and distinguished banker in the Royal Bank, but the view of the Royal Bank of Scotland, and I believe their financial advisers Merrill Lynch and UBS, was that Sir Fred's continued employment was critical to the next three months.

Q2693 John Mann: But you represent the interests of the taxpayer not the interests of a failed bank with failed advisers and a failed board, so why was he allowed to continue on in January?

Lord Myners: I believe that he was allowed to carry on because it was concluded by the board of the Royal Bank and by their financial advisers that his presence was absolutely critical to the capital-raising and management of the bank until Mr Hester's arrival, but he would depart almost as soon as Mr Hester arrived. You may remember ---

Q2694 John Mann: Why did you not just insist that he was sacked?

Lord Myners: Because it was not for the Government to do that. We were not a shareholder in the bank. This was a decision to be taken by the directors of the Royal Bank of Scotland. Remember these are distinguished people. Sir Tom McKillop, the former Chief Executive ---

Q2695 John Mann: Distinguished people? Distinguished people who have cost the taxpayers tremendous risks. Let us look at the future. Have you had a chance to discuss with Harriet Harman her proposals on retrospective legislation?

Lord Myners: I have not discussed Ms Harman's proposals.

Q2696 John Mann: So we can dismiss that then as purely hot air. Who is the legal action going to be against, the board of directors of the Royal Bank of Scotland or Mr Goodwin?

Lord Myners: I cannot anticipate that until the advice is provided to the Royal Bank of Scotland.

Q2697 John Mann: I know that you have been a politician for six months but a politician's answer is not good enough on that. Is the thought about directing action against Mr Goodwin or against the directors?

Lord Myners: I think we have to await the advice of the leading QC who is advising the Royal Bank on this matter.

Q2698 John Mann: Come on. When you are taking legal advice, you give them a brief to come back to you on. Is the intention to try and take action against Mr Goodwin or against the directors?

Lord Myners: As I understand it, the brief that has been given to the solicitor and leading counsel is to investigate a wide range of matters in the conduct of the board of the Royal Bank of Scotland.

Q2699 John Mann: So the taxpayer is paying for advice on a wide range of matters. It is pretty simple: either there can be action taken against Goodwin or there can be action taken against the directors. There is no other party that legal action can be against. I cannot see how it could be against Goodwin, so is the action against the directors for their incompetence and breaches of various Acts?

Lord Myners: As a non-legally qualified person I am simply not going to anticipate the legal advice that might be received. The Chairman said earlier on that these were matters of detail and I think this detail is appropriately directed by legal advice.

Q2700 John Mann: They are matters of policy and principle as well. Has anyone been able to suggest to you any potential legal remedy against Fred Goodwin?

Lord Myners: I believe that legal remedies against Sir Fred Goodwin are under contemplation in certain respects.

Q2701 John Mann: But has anyone ---

Lord Myners: Mr Mann, with all respect, I have answered your question. You are behaving as though I have not.

Q2702 John Mann: You are not answering the question. The question is quite simple, and we have had this for some time that there might be some legal advice being given. I have taken legal advice. Goodwin has accepted the money and I cannot see that there is any case legally against Mr Goodwin. It seems to me that any legal case is against the directors for breach of fiduciary duty in various ways. How can there be any specific legal case against Fred Goodwin, who has been given a package and has signed off that package?

Lord Myners: I think, Mr Mann, you are basing your observations on the pension alone.

Chairman: Mr Tyrie?

Q2703 Mr Tyrie: In this meeting with Slaughter & May at your elbow did you ask roughly the size of the pension?

Lord Myners: No, I did not. I was told by Mr Scott the pension will of course be enormous.

Q2704 Mr Tyrie: Did it occur to you that it might be a matter of some public interest?

Lord Myners: I believe that large pensions and large remuneration are a matter of considerable public interest, and issues on which I have previously expressed views, but bear in mind that Sir Fred Goodwin's pension pot was not larger than Mr John Varley's at Barclays. It was considerably smaller than Lord Browne's at BP or Mr Garnier's at SmithKline Beecham. It was of similar size to two directors at BAT, of which until which recently the shadow Secretary of State for Business was a non-executive director, so these large sums, Mr Tyrie, are ones which reflect the reality of the way executive directors had been allowed to be rewarded in recent years.

Q2705 Mr Tyrie: But since you had not asked you did not know whether it was a large sum or not, did you?

Lord Myners: I was told it was a large sum.

Q2706 Mr Tyrie: I see and when you were told that you did not say, "Roughly how much?"

Lord Myners: I did not ask roughly how much, and Mr Scott offered no further information at that time, and indeed when he spoke to me on the Sunday evening he was quite confused in the way that he explained the pension, and even raised the possibility that it would not be disclosed immediately but could be spread over a couple of years in order to deflect adverse comment.

Q2707 Mr Tyrie: So you knew that it would be politically sensitive, you had been told it was going to be large, but it just did not occur to you to ask roughly how much? You are really asking us to accept that as a reasonable action of a competent minister?

Lord Myners: It is for others to form the view whether I am reasonable or competent. I certainly endeavour to be both to the best of my ability. I recognise that I am new to the world of government and politics, but I do bring some relevant experience.

Q2708 Mr Tyrie: Were you relying on the fact that these were "distinguished" people who were taking this decision? Do you feel let down by these distinguished people?

Lord Myners: I regret using the word "distinguished", which I think I might have done to Mr Mann earlier on. I think I would prefer to say ---

Q2709 Mr Tyrie: Undistinguished?

Lord Myners: Experienced, Mr Tyrie. Do I feel let down? I feel the shareholders of the Royal Bank of Scotland have a right to feel let down. I feel that pensioners have a right to feel let down. I think it is quite outrageous that a departing executive, a man who led a bank into the largest banking failure ever, a bank which depends upon public support, should be drawing a weekly pension of 13,000, which compares to the national state pension of 92 for a single person or 150 or so for a married couple. This is quite unacceptable.

Q2710 Mr Tyrie: You have said that you are new to politics. Do you think that had something to do with the fact that you did not ask the obvious question, which is roughly how much is his package?

Lord Myners: No, I think I asked appropriate questions, but in particular I adopted an approach which is based around a clear articulation of principles, and I would repeat there was no dissent expressed by Sir Tom McKillop or Mr Scott. They did not say, "Wait a minute, Minister, we have actually already decided that we are going to double the value of his pension."

Q2711 Mr Tyrie: But you have already told us that you went into that meeting having failed to secure proper advice about the scale of the pension and you further said that you made no effort in following it through to ensure that those principles were put in place and were acted on.

Lord Myners: I do not think that I said that I had failed to take proper advice. I said that I adopted the correct approach which was a principle-based approach.

Q2712 Mr Tyrie: Do you think it is conceivable that an elected politician could have behaved in the way that you did in that meeting that day.

Lord Myners: I would like to believe that I behaved correctly; and I believe that elected politicians would behave correctly as well - particularly you, Mr Tyrie.

Q2713 Mr Tyrie: You think no elected politicians would have found themselves in a position of wanting to ask the question: roughly how much is the package we are giving Sir Fred Goodwin?

Lord Myners: I think an elected politician would have looked to Sir Tom McKillop and Mr Bob Scott, people of considerable experience - McKillop at AstraZeneca and Lloyds TSB, on the Board of BP, a colleague from BP also on the Board with him; Scott previously from CGU - who would have been able to understand those principles very clearly and to have interpreted what they meant and to have taken the necessary actions. It was not for me to seek to micromanage.

Q2714 Mr Tyrie: Do you think it is possible that the fact you took what I think most elected politicians would consider a pretty relaxed approach to the size of this pension derived from the fact that you yourself are the beneficiary of a very large pension from RBS? For the record it might be helpful, could you tell us what is the capital value of your own pension from RBS?

Lord Myners: I can tell you absolutely. I would not normally believe it was appropriate to disclose details about one's personal information but I am happy to tell you, Mr Tyrie, that the capital value of my pension from the Royal Bank of Scotland is approximately zero. Mr Alan Duncan made a statement of correction, an apology, to the House of Commons last Thursday in which he said that he had been incorrect in the assertion that he had made the previous week that in some way I was guilty of impropriety because I was myself the beneficiary of an RBS pension. I do not have an RBS pension, and I have never had an RBS pension. I hope, Mr Tyrie, you will accept that and possibly apologise for any suggestion in your question that I was in some way compromised, because I certainly was not.

Q2715 Mr Tyrie: A NatWest pension?

Lord Myners: I do not have a NatWest pension. Do you want to carry on?

Mr Tyrie: No!

Q2716 Chairman: I think our heads are full of pensions so let us get on. The letter from Miller McLean to me dated 11 March, I do not know if you have a copy of that - the letters that RBS and, indeed, HBOS have sent to me will be available for the press and public after this meeting - in the third page at the bottom it says: "In discussions between Philip Hampton and Sir Fred, RBS has suggested to Sir Fred that he waive his election to commute a cash lump sum from his pension which will be reinstated to its non-commuted form. Sir Fred was happy to consent to this in principle and appropriate arrangements are accordingly being put in place. RBS would like to thank Sir Fred for his assistance". I do not fully understand what that means. Can you explain it?

Lord Myners: Sir Fred's pension was quite extraordinary in a number of respects, and it does not reflect well on institutional investors that these were matters of record because his contract was open for inspection but no questions had been asked. Indeed, the major voting recommendation services had consistently recommended voting in support of the RBS remuneration policy. I mean by this the agencies known as ABI and RREV. The third agency, PIRC, was distinguished by the fact that they had recommended voting against the remuneration report. Sir Fred's pension was unusual in a number of respects. Firstly, he was deemed, on joining the scheme at the approximate age of 40, to have joined at the age of 20. He was credited with 20 years' of service. To the best of my knowledge he did not contribute into the pension scheme his pensions earned previously at Deloitte and Clydesdale; they were kept outside the scheme. He was allowed to choose his highest 12 months' earnings in the previous ten-year period, which I also think is a quite extraordinary structure in a pension scheme. Because his pension benefits exceeded the pensions cap set by Parliament, they were largely provided through a FURBS - a funded un-registered benefit scheme. A FURBS is not allowed to provide a tax-free lump sum. Accordingly, in December 2007, I believe, the Board of RBS decided that if Sir Fred took a lump sum from his FURBS (which he has now done, just under 3 million, I believe) that he would be compensated for the fact that this would be taxable, whereas it would not have been taxable if it had come from the RBS scheme - of which, as I have previously explained, I am not a member.

Q2717 Chairman: Are you saying to me that RBS are paying his tax bill?

Lord Myners: RBS are going to pay his tax. This was not disclosed to the shareholders. This was a significant amendment to Sir Fred Goodwin's contract of employment in, I believe, December 2007. It is a matter of judgement as to whether it should have been disclosed; but in my view, on the basis of my experience, it would have been proper to have advised the shareholders.

Q2718 Chairman: Can you assure us today that the taxpayers will not be liable for a further contribution here, if my reading of this correct?

Lord Myners: Chairman, I have to go back to my earlier observation about not abrogating legal agreements, and I think this is a legal agreement. However, Sir Fred said that in principle he is prepared to repay the lump sum but in turn, obviously, take a larger pension.

Q2719 Chairman: You go back and consult RBS and send us that information.

Lord Myners: I will very happily, on behalf of the Committee, through UKFI, communicate with Sir Philip Hampton and seek the information.

Q2720 Chairman: We need that quick. We need that information back within a few days.

Lord Myners: I do think it is to Sir Fred's credit that, in principle, he has indicated a willingness to do something here.

Q2721 Chairman: We want to know if there is a further contribution from the taxpayer. Finally, on this point, you said that Bob Scott was quite confused when he spoke to you about these arrangements. In my mind, given the track record of these people and what they did and how they failed this worldwide institution, why did you trust them? Mr Fallon's point to you about not scrutinising the annual report, you should have these officials working away like beavers look at this annual report. Really the truth after this discussion is that if Fred's agreement is watertight then you can do nothing at all, and he is out of the trap with a clean pair of heels and he has really left the Government flatfooted. That is a summation of it.

Lord Myners: I think one has to admire in a non-approving sense the dexterity of Sir Fred Goodwin in respect of his own contract; because you may remember that one of the things I persuaded Sir Fred to do was to give up his 12-month compensation for loss of office payment. Incidentally, how could he be paid 12 months' compensation for being fired on the one hand, and yet also a pension as though he had been requested to retire on the either? Either the man was fired or he was not fired. When it suited him he was fired; when it did not suit him he was not. These are the questions I believe the Royal Bank need to answer. With all respect, it is not for the Minister to answer those questions.

Q2722 Chairman: You have left me with the thought that you admire Sir Fred's dexterity, but at the end of the day it is the taxpayer who is the bloody mug here?

Lord Myners: Yes, and I was very careful to say that I did not approve. Just to complete what I was saying - he gave up his entitlement to 12 months' notice, but he actually then accelerated the receipt of his pension from October to February, and he carried on earning until the end of January. As a consequence what he gave as a gesture of giving back actually cost him nothing, because he earned for three months and he took his pension nine months earlier. Again, the Board of Royal Bank seemed to be very slow in appreciating what was going on, and that does raise serious questions about their overall performance.

Q2723 Mr Brady: First of all, just picking up one point from an earlier exchange, in response to John Mann you said that he was basing his view that Sir Fred Goodwin could not be pursued on the pension issue alone. Could I ask you just to be more specific: what other legal avenues are being explored?

Lord Myners: I am advised, Mr Brady, that it would be inappropriate for me to go into further details as that might in some way compromise the options that could be open to the Bank on behalf of its shareholders. I apologise for not being able to be fuller in my response; but I believe that it would be appropriate for me to take the advice I have been given.

Q2724 Mr Brady: But other avenues are being explored as a way of seeking recompense for the Bank, for the taxpayer?

Lord Myners: A wide range of issues are being reviewed.

Q2725 Mr Brady: When the issue of Sir Fred Goodwin's pension came to light you wrote a letter, Lord Myners, in which you said once you became aware of this issue "UKFI has, on behalf of the Government, been vigorously pursuing it". Can you tell the Committee please, Lord Myners, under what power UKFI has been doing so, given that it has terms of reference that relate to future remuneration packages but none relating to remuneration and contracts pre-existing?

Lord Myners: UKFI has responsibilities as the body which holds these shares on behalf of the UK people, and in so doing it is charged to perform as an engaged, informed, responsible shareholder. I believe that Mr Kingman, Mr Marino and the team that they have assembled are setting new standards of how shareholders should perform. As I said earlier, there were issues around Sir Fred Goodwin's pension, and indeed around compensation across a wide range of banks, which in my view shareholders should have been more alert to and more challenging about than they were. I hope that UKFI will raise the standard of institutional engagement.

Q2726 Mr Brady: You have obviously been involved in drafting the terms of reference in the framework document for UKFI in its conduct in handling those investments for the taxpayer. Can you point to the item in the terms of reference of the framework document that give it those powers?

Lord Myners: I was not involved in drafting the terms of reference in the framework document, and I do not have a copy of the document with me. I would be very happy to do that, but they are a shareholder and shareholders need to take these issues seriously.

Q2727 Mr Brady: I appreciate that and I now want to return to that. When I put this question to John Kingman quite specifically he responded, "There is none"; and I came back to it very specifically about the framework document, "No, there is nothing covered in it". The reason I am asking this question is not that I disagree with you that it is a reasonable position for a shareholder to take, but because I want to explore a little further some of the other reasonable interests that a shareholder might take and the public interest questions that arise from it. In looking perhaps at the framework document when refers to the "overarching regard for financial stability, financial or economic policy", would that extend to UKFI having an interest in the banks in which it is a major shareholder seeking to maintain the UK's skills base in financial services?

Lord Myners: I do not think that that would fall within the terms of reference of UKFI.

Q2728 Mr Brady: Even though clearly it is important for financial stability and the future financial economic policy of the United Kingdom?

Lord Myners: I think it is to manage the Government's investments in these institutions in a manner which is consistent with a much more balanced view than the very narrow financial matrix that lies at the heart of some of the problems that we have experienced in the financial sector over recent years. You did not quite allow me to finish my previous answer and that is probably because I am being long-winded, but I find it quite extraordinary that until very recently not a single institutional shareholder had raised any questions about the terms of Sir Fred Goodwin's departure, or the departure of Mr Cameron, or the departure of Mr Fish, who went on an even bigger pension. We have talked a lot about Sir Fred Goodwin, but Sir Fred Goodwin actually failed to be the top dog as far as pensions were concerned and these issues have not been pursued.

Q2729 Mr Brady: I am grateful for that, Lord Myners, but because our Chairman is very keen on keeping us to time if you get all of that on the record I will not be able to ask any questions. Can I return to this point, I want to explore really where the boundaries are of the public interest role as far as UKFI is concerned as the major shareholder in some of these banks. Concerns have been raised, for instance, particularly by some of the staff at the banks about the question of outsourcing, and whether services are being put to outsourcing contracts in India, for instance. Also last week a number of us went to Halifax and attended a public meeting where we met a lot of very angry, very worried employees of HBOS who are worried they might lose their jobs in a town which clearly depends very much on that one source of employment. Is any of that a legitimate public interest concern for UKFI, or not?

Lord Myners: I think that we must not lose sight of the fact that these are public companies and they have a responsibility to all shareholders; but within that context it is entirely appropriate for UKFI as a large shareholder to engage with the banks and ask them questions about these issues, and to form a view on whether the banks are making good and well-informed decisions on matters such as outsourcing, tax planning, offshore trust activities et cetera.

Q2730 Mr Brady: Good and well-informed purely from the question of the financial performance of the institution, or with the wider public interest in mind?

Lord Myners: I think companies should have a soul; they should have a moral purpose; and good companies are very conscious of their community obligations.

Q2731 Mr Brady: Thank you. Could I just ask one final question, which really is to look at the situation of any other banks that are not currently in receipt of support from the taxpayer, but which might come to the Government in the future for support. Would the same rules that have been applied relating to remuneration, bonuses and pensions be expected of, for example, Barclays Bank if it were to have recourse to Government support?

Lord Myners: A very wide number of banks are benefiting from Government support through liquidity, funding guarantees, loan guarantees, so I think your question is directed at the Asset Protection Scheme; and the principles that lie behind the Asset Protection Scheme were spelt out quite clearly on 19 January, and those are ubiquitous and would, therefore, apply to any other bank that might apply to APS. Of course, the FSA has now published a code on remuneration, and the Turner Review, I suspect, will say more about this tomorrow.

Q2732 Mr Tyrie: We had an exchange earlier about the size of your pension. I asked you whether you thought that what appeared to be your relaxed attitude about the size of this award, which you had been told was large, might have been related to the fact that you yourself were a beneficiary of a large pension. You told me that you did not have one from RBS; you did not have one from NatWest; do you have one from anywhere?

Lord Myners: I do.

Q2733 Mr Tyrie: Would you be prepared now to answer the question: what is the capital value of that large pension?

Lord Myners: I fully declared my financial interests to the Cabinet Office, to the Permanent Secretary at the Treasury, to the House of Lords and to Parliament.

Mr Tyrie: I am looking at an annual report here that gives me a rough idea. It is in the public domain; I am not asking you to say something that is top secret. I am just asking you to give us a rough estimate of the capital value - and I will give the figure, it is roughly a 100,000 a year pension from Gartmore.

Q2734 Chairman: That is a NatWest account from last year.

Lord Myners: That is the figure which was disclosed in the NatWest accounts from 1999. I also have a pension in respect of 11 years' of service with N M Rothschild & Sons, which I am not drawing. I have no pension entitlement as a consequence of my employment as a schoolteacher by the Inner London Association of (?).

Q2735 Mr Tyrie: What is the capital value, broadly speaking, of your accrued pension entitlements, roughly?

Lord Myners: I do not know the capital value.

Q2736 Mr Tyrie: That is roughly the question we were expecting you to ask about Sir Fred Goodwin, was it not, earlier?

Lord Myners: I simply do not believe that that is information which my family and I should be required to share publicly. I am receiving a pension; I am not drawing any ministerial salary at all; I am living off my pension and my accrued past earnings; and I do not believe that it is necessary or appropriate for me to have to disclose details of my personal finances, except to the Permanent Secretary and the Cabinet Office, which I have done in considerable detail, Mr Tyrie.

Q2737 Mr Breed: Just before we get on to another subject in respect of the regulation of complex financial instruments, I have been listening to the exchanges and it is hard not to come to the conclusion that Sir Fred Goodwin could have left the company in three ways: he could have voluntarily retired; he could have resigned; or he could have been dismissed. In the compromise agreement it seems fairly unlikely that he was going to resign; he might well have been challenged to be dismissed, but he might well have decided to fight that on an unfair dismissal charge; therefore the voluntary compromise agreement, which was so favourable to him, was in part at least to ensure that went quietly; that he did not expose all the incompetence and weaknesses not only of the Board but perhaps of the auditors and everything else; and it was felt that perhaps this would be a more simple way; hopefully it would all go away; he would go away with a very large sum - not perhaps as large as even some others, but it would be a means of actually shutting him up so that he would not, in being dismissed, really spill all the beans. Do you recognise that as a possibility?

Lord Myners: I do not really, because I think clause 21(b) of Sir Fred Goodwin's original employment contract, the one of 21 December 2004 (I mentioned that there must have been one before that), is very clear that if Sir Fred Goodwin is dismissed he is entitled to 12 months' compensation. I do not think there was any question of that being subject to legal challenge; any question of concealing information. It would have been a quite straightforward and simple thing to have done, and also to have placed an obligation on him to mitigate by seeking earlier employment elsewhere as quickly as possible, which would have brought to the end the monthly payments he was receiving.

Q2738 Mr Breed: The threat of dismissal did not pose any financial penalty on him at all, you do not believe?

Lord Myners: I think the Board could quite easily have concluded that the conduct of a man who was taking his bank towards a reported loss of 30 billion probably met the test of no longer enjoying the confidence of the owners of the business and the board of directors, and in those circumstances they could simply have terminated his contract.

Q2739 Mr Breed: Turning now to these complex financial instruments, John Moulton told this Committee that regulators simply cannot keep pace with financial innovation by the banks; and it is impossible for them to properly regulate them in their currently configured way. Do you agree with that?

Lord Myners: I think it is a real challenge for regulators to keep up to pace with the innovation of the financial sector, but I believe that relief is at hand; because these activities, firstly, were clearly nothing like as profitable as originally believed. If Lord Turner and other regulators require more capital to be held in support of those activities in the future, and clearly the financial stability forum is minded to do that as well, then they will become less prominent in banking in the future. Banking will simply become simpler, Mr Breed; the sort of banking that you and I know from Cornwall, which was a good honest branch bank, which took your deposits and lent money and did not engage in CDO2 et cetera.

Q2740 Mr Breed: Often nostalgia does not provide the tools for the future, Lord Myners; that is the problem. You do not believe the banks should in any way be reconfigured in order to be able to make them more easily regulated and supervised?

Lord Myners: I think the regulators need to ensure that they are able to fulfil their regulatory responsibilities; and if they see a gap between their abilities, competencies and legal powers and what is happening then they need to address that gap. I do not think we can allow a situation where there is a regulatory gap which is not being addressed.

Q2741 Mr Love: Can I really follow on on the issue of the future of UK banking. You have got a great deal of experience in the City. There is a lot of discussion about the very different cultures that make up retail, banking and investment banking. First of all, do you agree there are very different cultures; and, if you do, should those cultures be existing within the same organisation?

Lord Myners: I agree, there are different cultures, and I think it is quite a challenge to manage them. What we have seen in many banks globally is that the dominant culture of investment banking has infused into the rest of the bank. The investment bankers in broad-based banks have tended to become the key decision-makers and the highest rewarded. We must not lose sight of the fact that most people in banks are paid quite moderately. The average retiree from the Royal Bank of Scotland pension scheme was on a salary of 21,000.

Q2742 Mr Love: I understand that. Of course, there are many millions of people who have their very small savings deposited with retail banks, and very few who have the very large sums of money that are required for investment banking. Is there not a consumer interest in ensuring that the small depositor in a retail bank is protected against the much riskier activities that go on in investment banks?

Lord Myners: Mr Love, firstly, I would remind the committee that no UK retail depositor in a British bank has lost any money at all as a result of the crisis. I think the issues you are inviting me to comment on are around narrow banks versus broad banks, and around Glass-Steagall. I think it is interesting to note that quite narrowish banks, like Northern Rock, Bradford & Bingley, Freddie Mac, Fannie Mae and IndyMac got into trouble just as much as non-commercial banks like Bear Stearns and Lehman's. So I do not think there is a simple solution around the reintroduction, into America, and the introduction here of Glass-Steagall-like legislation. The key thing I think is around better supervision, better regulation, more capital, and particularly around liquidity requirements, which were lacking in the Basle. Concordat.

Q2743 Mr Love: I take your point about the need for better regulation, and the points that you have made but some people think the structures are quite important as well. You mentioned about whether or not it would be appropriate to introduce a strict separation between retail investment banking along the lines of Glass-Steagall. Most informed opinion does not seem to think that is really a runner in 2010. What is a runner? Is there any separation you would like to see; or should we just go ahead and continue in the way we have done?

Lord Myners: I think the separation will be achieved by significantly increased capital requirements. Lord Turner has spoken about an increase in capital for investment banking-type activities of multiples, rather than percentages. I would remind the Committee, that bonuses and profits in banks have at times been on the basis of what have transpired to be illusory profits. One of the problems for the banking industry was an acceleration of front-end loading of revenue from new products and structures which allowed fairly immediate calculation of bonuses on a product or a facility the true outcome of which would not be known for many, many years. This was a shortcoming in governance; a shortcoming in remuneration policy.

Q2744 Mr Love: I understand that. I understand why the public debate is all about that, but you do not see any need to separate out in any way - there has been a lot of debate about this; indeed, political parties are dining out on some concerns about the mixing of investment banking with commercial or retail banking - you do not see the need for any Government action to limit the sorts of risks that are borne in banks that have very large numbers of small depositors, as do retail banks?

Lord Myners: I think it is worthy of consideration, but there is a danger we may be concealing some core issues. Firstly, simple banks continue to contract with complex banks; and simple banks, like Northern Rock, got into difficulty because of some of their contracts with complex instruments. We should also recognise that banks suffered huge losses from very straightforward banking. The big losses we have seen from Royal Bank of Scotland are not exclusively limited to exotic instruments; they are largely arising from loans made to people who have not repaid.

Q2745 Mr Todd: I was slightly surprised in your list of things that need to be fixed that you did not list the governance of the institutions themselves. You have highlighted the problems of relying on a charmed circle of people who have great experience in these matters. I would have thought one of the things you have learnt from these unpleasant experiences is that that has got to change?

Lord Myners: I think, Mr Todd, I have mentioned governance a number of times in my replies: I think it is absolutely core in everything which we have been talking about in connection with Sir Fred Goodwin. I wrote an article for the Financial Times -----

Q2746 Mr Todd: Let me stop you there, bearing in mind I have heard what you have said. The Walker Review is being set up and one of the things that it will be looking at is risk management in these institutions. There are a number of models that could be applied. We have had evidence from Abbey Santander on the very different approach to risk management that they adopt there. Does that model or something like it commend itself to you?

Lord Myners: I think the Abbey Santander model is particularly attractive because they have non-pro-cyclical capital reserving policies.

Q2747 Mr Todd: They have got that because of the policy of the Spanish authorities, but they have their own policy on the entire separation of a risk function within the bank, brought in separately to the non-executive team?

Lord Myners: I was not familiar that was the arrangement at Santander, but in a speech last Thursday in Edinburgh I gave a number of pointers of what I thought Sir David Walker could do: one was to say that the risk line should have a direct report to the board of directors. I also talked about the need to up-skill the non-executive component on boards of directors; because it has been quite apparent to me, through my meetings with the chairs of the audit committees of our major banks, that there are some shortcomings in their understanding of the complex instruments that their banks are funding themselves through or are holding as assets.

Q2748 Mr Todd: Not just in their skills, but also in the resources they may have available to them to scrutinise the information that is provided to them?

Lord Myners: Mr Todd, I spoke about encouraging Sir David Walker to look at the case for audit committees having independent advisors to guide the committee; to ensure that they are up to speed on new products; to work with the external auditors; and to shape the development of the work of the committee. I think it is an idea worthy of further review.

Q2749 Mr Todd: Are there not just some products which carry so much risk that we should not let our financial institutions dabble in them altogether? Is there an argument for actually simply saying, "That is not something we permit to see traded"?

Lord Myners: If you do not understand it you should not do it.

Q2750 Mr Todd: I agree that is a good moral message, but is it something that we should place into a statutory framework?

Lord Myners: I think any board of directors where it could be proven that they were engaged in things which they did not fully understand may well be exposed to shareholder action.

Q2751 Mr Todd: That does not suggest that the Government is actually seeking to take any action on this; it suggests that the existing law already provides for action to be taken. Is that what your view is?

Lord Myners: I floated two other ideas in Edinburgh: one was that we could consider putting a statutory duty in the boards of banks to have regard to the impact of their decisions on financial stability. Recognising that banks are essentially ultimately underwritten by the public, should directors be required to have regard to the financial stability consequences? I have also suggested that we should consider putting a legal obligation around the responsibilities of fiduciaries, fund managers, assurance companies, to pursue good governance.

Q2752 Mr Todd: Exactly the point I am going to turn to. Another member will ask you about the rather woeful performance of the institutional investor community in this area. Looking to the future, what mechanisms might be applied which will enhance the performance of their function in holding these institutions to account on behalf of those who invest with them?

Lord Myners: I think there are some very serious questions which institutional investors should be invited to answer; because we have ended up in a situation where it appears that we have to some extent ownerless corporations. The ownership of our major firms, not just banks, is now so widely held across a number of institutions, none of whom own more than 2% or 3%, that nobody is much exercised to apply the care and attention that is necessary to behave in a manner consistent with ownership responsibility.

Q2753 Mr Todd: We have also had evidence here particularly from HSBC for example, a rather more conservatively run bank, that they had been under pressure from institutional investors to increase leverage, take more risks and so on. Really we have to look at how that community can be better tooled up to live up to the responsibilities they have - which are to look after the investments of blameless taxpayers, who are seeking to protect their pensions very often.

Lord Myners: I think we have to ask ourselves whether we have been too devout in our worshipping of the god of shareholder value, as measured in short-term shareholder performance. I submitted a paper to this Committee in June last year in connection with private equity; I was not a minister then; I alerted the Committee to my grave concerns about the build-up of credit risk; the fact that we were in an unsustainable bubble; and I highlighted the fact that this was placing at risk the sound management of good companies. One of the problems we have now, Mr Todd, is that we have good companies with inappropriate capital structures, part of which has been foisted on them by innovative bankers, and the private equity industry.

Chairman: You mention private equity and you have appointed Sir David Walker, and this is only a comment from me, but given that he had this private equity report, silent in taxation, vague in communication with employers, nothing on executive remuneration et cetera, what are we going to get out of Sir David? Okay, leave it!

Q2754 John Mann: Adair Turner is already drip-feeding his proposals, which is rather extraordinary behaviour for a regulator, and perhaps unprecedented for a regulator. As he increasingly asserts the independent role of the FSA, what mechanisms are you going to use to ensure that the FSA is doing what it should be doing to fill what you describe as the "potential regulatory gap which we cannot allow"?

Lord Myners: I have regulator meetings with Mr Hector Sants to discuss issues relating to the FSA; but the FSA is an independent entity; has its own board of directors, accountable to the Treasury and to Parliament. I also attend some of the meetings of the tripartite and through that forum I am also able to engage with the FSA. I think Adair Turner, quite rightly in his Economist speech a couple of months ago, set out the broad direction of his thinking in order to invite responses prior to tabling his final report, which I believe is going to be presented to the Chancellor in the next couple of days.

Q2755 John Mann: The question of off-shoring to the Caicos islands today in turmoil; government intervention; where is the financial regulation in relation to this? Who is going to ensure that the offshore UK dependencies are properly regulated?

Lord Myners: When I referred earlier on to "off-shoring", I think in answer to a question from Mr Brady, I was talking about the removal of jobs and functions, such as call centres offshore. You are talking about offshore banking. The Chancellor and I are both very exercised about offshore centres. The Chancellor raised this, I think, in response to a question previously in front of this Committee and will perhaps comment on it later this week. We have asked Mr Michael Foot to carry out a review into offshore centres and crown dependencies. I think very significant progress was made at the G20 meeting over the weekend. We have seen a dropping of the protective curtain behind which a number of offshore centres have operated. Let us be clear, very substantial amounts of tax are at the moment being avoided through offshore centres, and we need to look at that. We will look into how these state-invested banks conduct their activities in offshore centres.

Q2756 John Mann: My final question: I am sure you get the Sunday Times, this Sunday's Sunday Times has: investment sense 100,000 prize draw; up to 5% tax free yield. This is from Hargreaves Lansdown where, in the small print it says, "Oh, please remember investments can fall as well as rise in value". Are we just getting back into the same old cycle: money for nothing; prize draw - get your application in before April 5 to qualify for the prize draw. Is this not business as usual; money for nothing? Is this not the kind of thing you ought to be sorting out?

Lord Myners: I think you raise some interesting points.

Q2757 Ms Keeble: I wanted to ask about the way forward with some issues around the Asset Protection Scheme. There has been a lot of discussion about bad banks/good banks and I am sure you have seen that. To what extent do you think that the Asset Protection Scheme is an alternative perhaps to a bad bank, or that it is a precursor to a bad bank?

Lord Myners: I wonder if I could invite Ms Hegde to lead on that question.

Q2758 Ms Keeble: I have got a lot of other questions I want to ask.

Lord Myners: I feel I have dominated things!

Q2759 Ms Keeble: Let me ask some of the other ones than. Looking at the construction of the Asset Protection Scheme, the Chancellor set out very clearly three categories of components to it. You yourself, Lord Myners, referred to the CDO2 - what percentage of the assets likely to be covered in the Scheme are of those riskier products?

Mr Rathi: On your first question about the bad bank and whether this is a precursor to it, I think there are a number of similarities ------

Q2760 Ms Keeble: No, as I say, I have got quite a number of other questions, so just go on and deal with the second one.

Mr Rathi: Whether we go for an Asset Protection Scheme or a formal bad bank, the key first task is to identify what the impaired assets are and to understand those on an asset-by-asset basis and to do that as quickly as we can. We have built in sufficient flexibility in the Scheme through step-in rights for the Government in defined circumstances to be able to move to a bad bank concept at some point in the future, if that is what we consider necessary. On the complex instruments, we have done a certain amount of diligence on the assets that have been put forward by the two banks where we have reached in principle agreements. In the case of Lloyds there is a very limited number of complex instruments - a very small number to bring forward.

Q2761 Ms Keeble: What percentage, roughly?

Mr Rathi: In the case of Lloyds it is very low indeed, close to negligible. In the case of RBS there is more work ongoing. I would say it is in the region of 10%-20% of the assets they are putting forward.

Q2762 Ms Keeble: Okay. If we can come back to what Lloyds has got covered. 83% of its covered assets are in fact from the HBOS bad book. Would it not have been preferable and perhaps cheaper to have dealt with HBOS separately, rather than to have encouraged, as the Government did, the merger?

Lord Myners: The decision by Lloyds Bank to acquire HBOS was made, Ms Keeble, by the Board of Lloyds TSB and supported by their shareholders with alacrity.

Q2763 Ms Keeble: But previously there was discussion about the encouragement by the Government of that merger?

Lord Myners: I am not aware that the Government encouraged the merger; but I was not a Government minister at the time. What I do know is the government enabled the waiver of a competition obligation which they subserviated to the needs of financial stability.

Q2764 Ms Keeble: If we go back to the assets which are included in the scheme, Lloyds actually put out a list of the percentage of its assets it would cover that came into different categories, and it did not actually follow the categorisation which the Chancellor gave. I wonder if you are going to go back and scrutinise the figure that Lloyds gave to make absolutely sure about what is covered by the scheme?

Mr Rathi: Certainly. We set out a fairly broad range of criteria for eligibility in the scheme. We are in the process of an asset-by-asset diligence and will publish, when the final contracts are signed, more details about exactly what assets will be covered by the scheme; and any assets that do not meet the eligibility criteria will not be accepted into the scheme.

Lord Myners: I also think CDO2 and CDO3 are unlikely to apply for cover because they have embedded equity characteristics.

Q2765 Ms Keeble: Part of the quid pro quo for this was that the banks maintained liquidity at 2007 levels, which originally was supposed to be the responsibility of UKFI to monitor, but most recently UKFI told us here that in fact it was the Treasury that was monitoring that. Who in the Treasury? Which Minister has got responsibility for it? How is it going to be reported?

Ms Hegde: I think you may be conflating two different sorts of lending commitments. The commitment by banks which participated in the recapitalisation in October was to maintain lending at 2007 levels, and that was the obligation which was initially placed with UKFI to monitor. Subsequently, when the APS was announced, and it was agreed that some lending commitments and commitments on remuneration would be part of the deal on the APS, it was clear that there was going to be a further lot of monitoring of those lending commitments. Since the APS is not something that is suitable to be monitored by UKFI it made sense for the Treasury to do it. The APS is a significant commitment of public spending on behalf of the Treasury, and it is ultimately the Chancellor's responsibility to account for that.

Q2766 Ms Keeble: Okay, but the lending levels, we were specifically told by UKFI when they came here last time that that was being left over?

Ms Hegde: That is right. So that reverts to the Treasury too. All monitoring of lending will be dealt with by the Treasury.

Q2767 Ms Keeble: Which ministerial hat are they coming under?

Ms Hegde: That is the Chancellor's responsibility.

Q2768 Ms Keeble: That is going to be the Chancellor, okay. In addition to looking at the new lending, is there going to be scrutiny of what the banks are doing about their existing loan books; because certainly there is a certain amount of evidence that the banks in scrutinising some of their existing loan books are bearing down very heavily on existing small businesses?

Ms Hegde: I think inevitably there has to be scrutiny of existing loan books, because the lending commitments only make sense if you understand where you are starting from. For example, part of the commitment of banks participating in the APS is that, in the case of RBS for example, there will be an increase of an additional 25 billion of lending - 9 billion of which will be for mortgages and 16 billion for business; and in the case of Lloyds it is an additional 14 billion - and that breaks down as 3 billion for mortgages and 11 billion for businesses. Part of the process that is going on now is base-lining where those banks are at the moment in order that we can make sure that the lending is indeed additional.

Q2769 Ms Keeble: Sure, but you understand the point that there is not much point about being punitive about people with existing loans and then saying they have to be generous about extending new loans? There has to be some balance between the approach that is taken to the existing loan book as well as maintaining levels of new lending?

Ms Hegde: I think the art of achieving our public policy objective here will be about achieving a balance between increasing lending to the economy - which is the overall public policy objective and which we have made concrete in terms of the specific agreements we have with Lloyds and RBS - and also actually permitting the banks to continue to make commercial decisions on the ground at branch level, which individual decisions we cannot monitor or hope to monitor.

Q2770 Ms Keeble: Because the insurance scheme is off balance sheet, what kinds of studies have been done of the likely cost to the public purse once the losses crystallise? You must have done some projections going forward?

Lord Myners: The projections will depend upon the economic outcome. If you look at HBOS, for instance, because so much of that book is dependent on UK residential and commercial property values, the extent of any claims under the Asset Protection Scheme will be a consequence of how values move there. Remember, there is a very large first loss requirement; there is a very substantial premium being paid; and there is a continuing 10% vertical quota share participation that HBOS or Lloyds will have in the ongoing protected book. Calculating the likely claims is difficult; but as the Chancellor has said in another place, experience elsewhere of such schemes has suggested that the costs are often a lot less than people originally anticipate. A recovery of confidence, an improvement in economic performance and strongly recapitalised banks will mean that the claims on these schemes will be a lot less.

Q2771 Ms Keeble: Yes, but you must have some best case/worst case. There is going to be more probably than Fred Goodman's pension?

Ms Hegde: Could I just make a factual point. I do not think it is quite right to describe the APS as being "off balance sheet". The possible losses that might arise from the APS are contingent liabilities in the language of public expenditure. Those will have to be shown in some way in the Treasury's Annual Report and Accounts. They will be reported on in that way.

Q2772 Ms Keeble: Have you got any estimates of them, of what it is likely to mean to the taxpayer and what it is likely to mean in terms of future decisions?

Ms Hegde: At the point where contracts are struck, which is the point we are working towards at the moment, at the moment Nikhil has mentioned that we are in an extensive process of diligencing the assets; that will give us the information that will enable us to build a bottom-up picture of what we think the likely losses are likely to be.

Mr Rathi: Part of the reason for the Scheme is the huge uncertainty that exists around these assets and their value and how they are going to perform in different economic scenarios going forward. Much of the work we are doing at the moment is on an asset-by-asset basis to get some understanding precisely of the risk transfer that has been passed to the taxpayer. In judging how we price the Scheme, we are working to making sure there are appropriate protections for the taxpayer, as the Minister has said, through a fee, through the first loss, through the 10% share of any second loss. Also a point which is not fully understood, if at any point the first loss is burnt through, 90% of the recoveries that come from these assets over time, and many of these assets will mature over several years, they come to the taxpayers' account first. We will benefit from the upside of these assets as they recover. Obviously also the big imponderable is, at some point the Government will exit its equity stakes at some point in the future, and exactly what value we will get from that is unclear at this point.

Lord Myners: I think this is much different from the Equitas case at Lloyds, with a very similar approach being adopted.

Q2773 Jim Cousins: I wonder if I could ask you what proportion of the assets are located in the United Kingdom, in Britain?

Ms Hegde: I will ask Nikhil to answer that.

Q2774 Jim Cousins: I am here talking about the assets that are being protected in the Asset Protection Scheme.

Ms Hegde: In the case of Lloyds, most of them I believe; in the case of RBS, a large proportion of them. I think Nikhil has probably got the precise numbers.

Mr Rathi: In the case of Lloyds practically all their assets are UK-based assets. In the case of RBS, the majority of assets are UK-owned, but many of the UK-owned assets are based on collateral which is overseas. I would say the majority of the underlying collateral is overseas in the case of RBS.

Q2775 Jim Cousins: Let us be clear about this: RBS because they are so huge, 300 billion have been put into the Asset Protection Scheme, and of that the majority is outside the UK. Who is bearing the exchange rate risk on that?

Lord Myners: The Treasury has concluded at this stage that it will bear the exchange rate risk; but as we get closer to finalisation of the Scheme I imagine, Mr Cousins, that that will receive more scrutiny.

Q2776 Jim Cousins: Let us be clear about this: on top of the risks of the Asset Protection Scheme itself because, certainly in the case of RBS, the majority of the assets are outside the United Kingdom, there is an exchange rate risk as well, and we have not yet clearly decided who is going to meet that?

Ms Hegde: It is generally not the Government's policy to insure itself against exchange rate risk - as a sovereign we do not do that. That is where the decision is at the moment. While it is true that the majority of RBS's assets are outside the UK, the benefits from the Scheme will of course flow back to the UK.

Q2777 Jim Cousins: Let us be clear about the implications of what you have just said. If it is the Government's policy not to insure against the exchange rate risk, then it means the exchange rate risk, which is plainly there if more than half the assets are outside the United Kingdom, are being directly borne by the Treasury?

Ms Hegde: I think that is correct but in the sense that we do not bet on sterling and the Treasury bears that risk anyway - that is the status quo.

Lord Myners: I think that is consistent with Government policy over many governments.

Q2778 Jim Cousins: Again to be clear about this: that means that the Asset Protection Scheme has got a further degree of exposure beyond its own boundaries because the assets being protected are outside the UK and there is an element of exchange rate risk about them?

Ms Hegde: Correct.

Q2779 Jim Cousins: We are visualising that these relationships, through the Asset Protection Scheme, will not be relationships for today and tomorrow; they could last decades, could they not?

Lord Myners: I think it is unlikely that they will last decades, Mr Cousins, but they will have to match the tenor of the assets that are placed in the Scheme but they will run-off. The average and medium maturity of the Scheme will be a lot shorter obviously than the final maturity of the longer-standing asset.

Q2780 Jim Cousins: Do you have any figure for that medium maturity?

Lord Myners: We will do as part of the documentation for the final agreement. This will be worked through into enormous granularity. We will need to fully understand every aspect of the risk portfolio that we are underwriting. We will be adopting the very best practices of insurance.

Ms Hegde: The other thing to take into account, I think, would be the fact that there must be the opportunity for participants in the Scheme to exit, in the same way as you would be able to exit an insurance contract.

Q2781 Jim Cousins: Lord Myners, Mr Rathi gave us an alternative form of exit from these arrangements, which is that the Government might decide to actually break off these protective assets and park them somewhere in a so-called "bad bank". Has the Government already prepared a set of criteria for the situations that would give rise to that?

Lord Myners: One of the things I found when I became a Government minister was the ability of people in Treasury and the huge amount of forward planning that had been done. A lot of forward planning has been done around options about how we would manage assets on which claims were made, on which we then became effectively the 90% equity holder. Wrapping them up into a bad bank, packaging them to sell them on to other people, are options that are available to us; as is the option of continuing to support the bank in the workout of those impaired assets - which of course we are encouraging the banks to do by giving them a continuing 10% responsibility, liability incentive through the vertical structure of the quota share.

Q2782 Jim Cousins: What are the situations that could give rise to a forced sale or a break-up and separation of the assets from the rest of the banks?

Lord Myners: It is difficult to speculate with any specificity at this point, but simply to say that if that made good sense for the Government it would be done.

Q2783 Jim Cousins: So, for example, in the case of RBS a fall in the value of the currency against some of the key locations where the assets being protected were might trigger such a situation?

Lord Myners: I think it would be unwise to be drawn into something which is hypothetical; but simply to say that this programme will need quite intensive and resource-heavy management. We are taking on very substantial contingent liabilities into the public sector; those cannot be managed without the appropriate resources, highly professional people, a combination of Treasury officials, of whom I have already spoken highly, and people drawn from the insurance, actuarial and other legal professions.

Q2784 Jim Cousins: Is the build-up of this situation over a number of years within RBS part of the wide range of issues that you say you have referred to lawyers?

Lord Myners: I would rather not be drawn on that issue, not least of all because the instruction to lawyers has come from RBS and not from Government.

Q2785 Sir Peter Viggers: Do you think that the recent banking crisis demonstrates that the model of having non-executive directors in banks is a model which is really effective? What more could be done to make sure that non-executives fulfil their role?

Lord Myners: I think, Sir Peter, there needs to be a wider debate here, not only in this country but also elsewhere. I wrote an article for the Financial Times in the summer of last year, again before I became a manager, pointing out the lamentable state of independent director performance on banks of directors. I cited Citibank who had recently placed an advertisement for non-executive directors in which they said "Some financial experience would be helpful". I have talked about cultures which are not sufficiently inquiring and I have spoken more recently about the need to ensure that non-executive directors are sufficiently well-informed. Whether it is a part-time job must be a matter for debate. The idea that you turn up once a month to a meeting and the occasional committee meeting may fall short of the expectations we have now placed on non-executive directors, but again that has implications also for the community from which non-executive directors are drawn, which on the whole is far too narrow. If you invite people who read the same newspapers, went to the same universities and schools and have the same prejudices and views to sit round a board table you do not get diversity of view and input.

Q2786 Sir Peter Viggers: Following that, Sir David Walker is carrying out a study of corporate governance because he has the City in his DNA (and I have very high regard for him) as do you. Is he the right person to carry out the study and are you the right person to consider it?

Lord Myners: It is for others to decide whether I am the right person to receive his report, but you can rest with some ease because he is reporting to the Chancellor and the Secretary of State for Business and Enterprise and they undoubtedly are the right people for him to report to; I am just a junior player in this. As for whether Sir David Walker is the right person, I think he is. He brings valuable experience of being a director of the Bank of England and a chairman of the SIB. He sat on a number of boards. He is wise and he is reflective, he is measured and moderate in his approach, but he does not pull his punches.

Chairman: An insider's insider.

Q2787 Nick Ainger: When we took evidence from the FSA earlier in this inquiry they told us that they were reassessing the criteria for approving individuals as "fit and proper". How do you think the process of appointing bank directors and key people, such as the head of risk management, for example, can be improved, bearing in mind the record of distinguished directors at RBS, for example?

Lord Myners: I did, Mr Ainger, withdraw my descriptor of "distinguished". This is an issue which I imagine Lord Turner is going to address in his report later this week. I think you were earlier told that the FSA really look for criminal convictions. That does not seem to me to be setting the bar at an appropriate level. One of the things I would like institutional shareholders to do is to have much more engagement with non-executive directors, to sit with the non-executive directors, to talk about the issues, to form a view on their competence, to understand what is going on in their minds - what are they worried about at the moment? From my experience of contact with some of the non-executive directors of some of the banks where we have intervened it is quite illuminating to know what is on their minds and, perhaps more interesting, what is not on their minds.

Q2788 Nick Ainger: Some of the evidence we have had, particularly in relation to HBOS and the appointment of an individual there as the head of risk management who it would appear had no direct experience of risk management, is that it is not just the executive directors; it is key people within these organisations. Do you think the FSA should have a direct role in not just checking that they have not got a criminal record but that they do have the competence, the experience and possibly the qualifications to carry out the role that they have been appointed to carry out?

Lord Myners: I believe that there are certain officials in a financial organisation who do have to be approved by the FSA - the heads of audit and compliance and risk. Perhaps that needs to go further.

Q2789 Mr Mudie: How do we align rewards more closely to the long-term sustainability of firms? When you are dealing with that would you pass comment on where you see rewards ending up after this present period? In other words, I think the public are very critical of the level of rewards to certain people in the financial sector. Do you think we will go back to that level or that some commonsense will be shown?

Lord Myners: There are several questions there, Mr Mudie.

Q2790 Mr Mudie: The Chairman is very tight on time so he has asked me to ask them and you have not to answer them.

Lord Myners: Setting objectives and performance goals which are clearly around short-term share price movement I think must be highly questionable, and that is at the core of many of the problems that we face. As for proportionality and appropriateness of remuneration, I think we need to break the grip of the benefit consultants. I think we need to open up reporting on the whole culture of remuneration in a company and to introduce internal comparators, that is, to express the chief executive's remuneration in relation to other people within the company, to explain why this gap has got bigger and bigger. The issue of the right levels of bonuses is very difficult. I imagine that Mr Fallon must have grappled with this. He is chairman of the remuneration committee of Tullett Prebon which paid a bonus of 4 million to its chief executive in 2007 that was even higher than the bonus paid to Sir Fred Goodwin for a company which is probably only 5% of the size of Royal Bank of Scotland, but I defer to Mr Fallon for his wise advice on how you reach decisions on fair and appropriate remuneration.

Q2791 Mr Mudie: You do get even quickly, do you not? I dread to think what you are going to say next.

Lord Myners: I have been visiting Leeds recently, George.

Q2792 Mr Mudie: You have mentioned the deficiencies of remuneration consultants. The ABI suggested a code of ethics. You, for example, suggested in a recent speech that they should seek views from investors, employees, and I have put "trade unions" but you have put "their representatives". I suppose that was a step too far for New Labour, consulting trade unions. Can you explain your thinking in this role?

Lord Myners: I think that remuneration committees need to have a wide range of inputs and it would seem to me entirely proper and would lead to better decisions if they took advice from more than just the benefit consultants, the people that Mr Warren Buffett describes as "Ratchet, Ratchet & Ratchet". I see no reason therefore why investors should not express views and why employees, either directly or through trade unions, should not also have an opportunity to input their views - not to make the decision; that must be made by the directors.

Q2793 Mr Mudie: Following your speech to the National Association of Pension Funds on shareholder failure, what reforms do you have in mind yourself?

Lord Myners: I think I am calling on institutions to reflect on how they have seen such huge losses accumulate in their clients' portfolios and what it is that they should have done which they did not do. I note, for instance, that institutions, as I said earlier, voted in support of acquisitions which were value destructive. I think there is case for looking at the Takeover Code. The Takeover Code is a bit like the British guns in Singapore - it is pointing in the wrong direction. It protects the shareholders in the target company but not in the offeree company, even though we know from experience of academic research that the offerees suffer the greatest damage. I think the institutions need to wake up. It is very interesting that RBS had a number of insurance companies in its group. The ABI's policy on pensions - back to Sir Fred Goodwin for one moment - says that undiscounted pensions should not be permitted and yet here we have a bank which owns an insurance company which is a member of the ABI and which pursues policies which are inconsistent with the principles articulated by its own trade association. There is a clear need here, Mr Mudie, for institutional investors to wake up to the responsibilities of ownership.

Q2794 Mr Mudie: Those are words though. Apart from selling up, what powers do they have? Have they sufficient powers or should they be given new powers to ensure that the board listens to them?

Lord Myners: Investors in UK companies have very substantial powers. They have amongst the most significant powers of investors anywhere in the world. The ability to convene meetings to remove directors is not embodied in company law in the United States of America in most states and it is not common practice in Europe. It is not a question that they do not have the powers, Mr Mudie; it is that they have not exercised them.

Q2795 Mr Mudie: When we were talking about Sir Fred, Legal & General claimed the year before that they had demanded of the board that Sir Fred be removed. If they have got all these powers is it just the fact that these powers are there but the code of the City means they are not used?

Lord Myners: I read with great interest the Legal & General evidence to the Committee and I thought in the end they just ran into sand, did they not? They just gave up. I hope that others will learn from that lesson. You cannot give up. You are the owners. You have a responsibility to unit trust investors and pension policyholders and insurance policyholders to act in their very best interests. You cannot just stop when you see things happening of which you do not approve.

Q2796 Mr Mudie: Is there a recent example of these powers being used?

Lord Myners: They are used modestly.

Q2797 Mr Mudie: By whom? Do you have an example?

Lord Myners: I am stretching to find a recent and relevant example, which I think probably supports the contention that lies behind your question.

Q2798 Chairman: Lord Myners, if you had read the transcripts of our Committee previously you would have noted that both myself and Mr Fallon brought to witnesses' attention pages 102 and 103 of Barclays' annual accounts which had been sent to them. They are totally and utterly incomprehensible and you have got 40 billion there. Lord Turner said that he could not understand them at the end of the day although he made a valiant attempt. The chief auditor of KPMG said he could not look through these annual accounts and at the end of the night feel he could understand them. Given the issue of tax avoidance and schemes and other issues here, this is a big issue and one thing we want you to take back is to look at these issues and get these banks to simplify them. Otherwise, the notion out there is that they are hiding things.

Lord Myners: Agreed.

Chairman: You agree; thank you. On that note of agreement can we thank you and your colleagues for your attendance this morning. We did overrun but it was a very worthwhile session for us and hopefully for yourself.