Royal Bank of Scotland, Northern Rock and Lloyds Banking Group - Treasury Contents

Examination of Witness (Question Numbers 1-19)


12 JANUARY 2010

  Q1 Chairman: Mr Hester, welcome to the evidence session this morning on fully and partially owned state banks. Can you introduce yourself for the shorthand writer, please?

  Mr Hester: My name is Stephen Hester, Chief Executive of RBS. I apologise for my voice, which is a bit croaky at the moment.

  Q2  Chairman: Recently you were quoted as saying that there is too much politics in banking. Surely, it is thanks to government intervention that banks like RBS are still standing. Could you maybe clarify your remarks on that, please?

  Mr Hester: I think that the notice that my remarks got perhaps made my point for me. In retrospect, I might have not bothered to make the point. It probably would have been better to keep quiet. The point that I was trying to make was that there are, in a sense, two sides to the coin. I completely understand why banks are of great interest to politics—I use the word with a small "p", including the media and everything—both in terms of the systemic issues arising out of the financial crisis, the regulatory issues and all the other public policy issues, and I completely understand why a bank such as RBS, which has been very much in the eye of the storm of some of these issues and is in receipt of enormous public support in funding terms should be in that eye as well. From that point of view, I understand 100% why the small "p" politicisation or the attention, if you like, happens. The point that I was trying to make, obviously inadequately at the time, is that I am charged with a narrower job, and that job was to look after the interests of returning RBS to stand-alone safety and security, serving our customers well and serving our shareholders well and, in so doing, getting the state its investment back, hopefully at a profit. The point I was simply trying to make was that the more that RBS's recovery efforts can be featured in the business pages and the less on the other pages in the media, I think it will be helpful to all of us and to my job to try and get the taxpayer's money back into profit. That was the point I was making. I think I did not make it very well.

  Q3  Chairman: Given the 84% economic stake the state has in RBS, it is going to be hard to achieve that.

  Mr Hester: That is right.

  Q4  Chairman: The Treasury has placed conditions on RBS in return for you entering the Asset Protection Scheme. Can you briefly outline the conditions for the record, please. Also, I note that one of the conditions is a two-year delay between an asset defaulting and the APS paying out. What type of repercussions could that have for RBS?

  Mr Hester: Please forgive me if I do not go through all the conditions because there are quite a lot of pages.

  Q5  Chairman: We have a lot to get through this morning so the briefer the questions and answers, the better for the record.

  Mr Hester: They are all set out in detail in our prospectus that was published to get shareholder approval for the Asset Protection Scheme. There are a very wide range of detailed rules to the scheme by which we have to abide, so I will not go through them all. The point that I would make is that the Asset Protection Scheme was very fundamentally restructured before it was completed, and that is because the world looks a bit less gloomy today than it did in February, when the Asset Protection Scheme was conceived, and also RBS's far-reaching restructuring has begun to pay off as well. As a result of those two things, the Asset Protection Scheme was made much less powerful, much less protective but therefore also less expensive, and that means that we regard it as an unlikely for RBS to call upon the scheme that is there, a sort of rainy-day scheme, whereas when it was first conceived it looked likely that we would need it. I hope, and it is our ambition, within the next two or three years that we will be able to exit the scheme altogether without ever having used it. In the near term it is of course very important and was a very important ingredient last year of restoring confidence in RBS's solidity.

  Q6  Mr Todd: The conditions include a two-year delay on payout by the scheme if a default occurs. What would be the implications of that if that were to happen?

  Mr Hester: I do not believe they would be significant because if a valid claim had been made—and, as I said, I do not expect to make valid claims because I do not think we will make losses of the scale that would require it, but if one had been made, then it would be, if you like, a debt of the state as insurer to reimburse us, and therefore the fact that we did not have the money for two years would not matter provided the UK government was seen as being good for the money, which is, I think, a fair assumption to make. So we do not have a difficulty with that feature although, as I say, I believe and hope that that will be otiose.

  Q7  Mr Todd: One of the other features commented on was the potential for the Treasury to insist on assets being transferred to another management. What was your perception of that condition?

  Mr Hester: I think we are learning many things as the intersection of business and government has been more intimate than in many of our experiences over the last year, and one of the things we learn as a result of public scrutiny over the use of public funds and public accounts, looking at all these kind of things, is that the rules that government have to abide by are a bit different than the rules in the private sector would be, and so we are trying to meld a government—

  Q8  Mr Todd: So you did not see it as a criticism of your own team's competence in managing the accounts?

  Mr Hester: There are a series of what I would describe as "belt and braces" clauses that if the Treasury were to be unhappy with RBS's stewardship of the insured assets, the Treasury has a range of recompense, including ultimately taking them away from us. My point would be, if that were called upon, it would firstly, I hope, only be because of a severe failure on RBS's case, which I hope will not happen, and secondly, I think it would be a terrible thing because we would not be able to manage our own bank, but I understand why on a belt and braces basis the Treasury wanted that.

  Q9  Mr Todd: Finally, over half of the assets insured are actually outside the UK. Does that seem equitable? Is that an unavoidable aspect of the scheme because we are propping up a bank that is sprawled across the world?

  Mr Hester: The intent of the scheme from the beginning was to provide a level of extreme loss protection, and therefore it was applied to the assets that could potentially give rise to loss and, because a lot of RBS's balance sheet is applied across the world, inevitably therefore there were both UK assets and foreign assets, and were that not to have been the case, the scheme would not have had the protective use that it did.

  Q10  Mr Todd: Yes, the bulk of which are indeed foreign assets, including exposure to Irish banks and other institutions which we have reason to question.

  Mr Hester: There are a lot of foreign assets in the scheme. That is right, yes.

  Q11  Chairman: Do think politicians have a legitimate interest in scrutinising bankers' bonuses?

  Mr Hester: I regard this as inevitably a no-win subject. In fact, I think it is a lose-lose subject. I was clear, I hope, when I was here a year ago that, on a personal basis, I think that there have been significant instances of pay that is hard to justify in parts of the banking industry, and I completely understand the public interest in that and the political interest in that. I further understand it because, until the banking industry can demonstrate that in times of crisis it does not need public support in the level that has been given, the banking industry I think has invited on itself this kind of scrutiny and intervention. One of the things that I think is most important—not for this reason, by the way, but for public policy reasons—is that the far-reaching reforms of the banking industry that are going on globally over the coming years do indeed get to the point where a crisis can happen and banks do not need to call on this level of public support. So I do completely understand for all of those reasons the level of scrutiny.

  Q12  Chairman: I asked that question just on the basis of the comment that has been made on your remuneration package, Mr Hester. I do not want to get into it in great detail but it seems the sheer scale of the package is out of sync with what is happening elsewhere. Surely, you must rank as the UK's highest paid public servant, with a potential remuneration of £9.7 million. At a time when the industry has been almost totally bailed out by the taxpayer, do you not see that as a legitimate concern for people?

  Mr Hester: I think I have also been quoted as saying that if you asked my mother and father about my pay, they would say it is too high as well, so even some people close to me have that view of bankers. Clearly, it is very hard for me to talk about my own pay. All I can say to you is that when I was asked to do this job—I did not apply for it—the only conversation I ever had about my pay, and to this day this is true, is that I was asked what it would take to attract me to leave my previous job to do this job. It was presented as a private sector job where the task was to restore RBS to strength, to serve customers well, and to get the taxpayer money back through a private sector return. That job, as it was laid out, all I ever said about my pay was that I would be content to be paid whatever the going rate for doing similar jobs elsewhere was. I never named a figure; that was entirely up to the Remuneration Committee. I would note that the package that has been much discussed in the press as of today is worth very close to nothing because the share price has not risen over the last six months and therefore the vesting conditions as of the moment would not be applying. Obviously, we are all incentivised for other reasons to try and improve on that over the period.

  Q13  Chairman: So are you going to jettison the biblical commandment "Honour thy father and mother" and stick with your pay packet? You are not going to take them on then?

  Mr Hester: I try to avoid it.

  Q14  Chairman: There are people saying that RBS may just benefit from a decent economic environment and recovery and therefore things outside your control will be to your benefit. It has been suggested a basket of indicators may have been a better yardstick. But even if RBS does well as a middling bank, and I have looked at your remuneration arrangements here, and the share price reaches 40 pence, you would be in line for 25% of the options and shares. How much would you make in that less successful scenario?

  Mr Hester: I am afraid I do not know the answer because I can honestly say I have not scrutinised it.

  Q15  Chairman: Can you write to us on that?

  Mr Hester: I would be happy to do that, yes.[1]

  Q16 Nick Ainger: You say this subject is a no-win situation for you. In fact, for some of your staff it is very much a win-win situation. They have won their job and now they are going to win a bonus. What is the overall bonus package that you are considering giving to your staff in the coming weeks?

  Mr Hester: We do not yet know the answer to that.

  Q17  Nick Ainger: Just in round figures?

  Mr Hester: What we do—and I think other banks do the same but obviously I can only talk for us—is that there are, if you like, two ingredients in how we seek to pay people. The first is how they have done relative to what we have asked them to do, and the time that we know that is once we have closed the books for the year and we know what our profits were and we know what our balance sheet was and so on, which happens during the next two months. Secondly, we need to understand what the market for people is because, obviously, as a shareholder-owned company, we want to pay our people the minimum possible consistent with keeping them engaged, motivated, and doing the things the shareholders want them to do, so part of that is how well our people have done against the tasks they have been set and part of it is how the market against which they compare themselves remunerates. Again, over the next few weeks we will see other banks reporting ahead of ourselves, which will give us information on that. So between now and the end of February I would expect the Remuneration Committee of the Board to assimilate those two crucial pieces of data and come up with a recommendation.

  Q18  Nick Ainger: You cannot give us a ball-park figure? Is it over £1 billion? Is it a billion and a half?

  Mr Hester: I think it would be irresponsible until we have those two pieces of data.

  Q19  Nick Ainger: On the principle of bonuses, should not bonuses reflect the overall performance of a company? RBS has been the worst, in terms of its share price, performer of all of the FTSE 100 companies. You have shed over 3,000 jobs, you made a record loss in 2008 of over £24 billion, and your half-year results for 2009 showed another loss of over £1 billion. Why would you pay anyone a bonus for that performance?

  Mr Hester: That is a very good point, and one of the things that we try to do is really be amongst the leaders in fundamentally reforming some aspects of the way our industry has worked. So, for example, historically people at RBS, when they were given bonuses, were just given bonuses in cash. By changing that to giving the majority in shares you make sure that if the shareholders lose, so does the employee who owns shares. Similarly, we have introduced the most far-reaching clawback clause of anyone in our industry, so that if people are given bonuses today based on a business mix that turns into losses tomorrow, then money can be taken back. Had those measures that we have introduced been in place in prior years, it would not have stopped RBS making a loss but it would have made people feel that the employees who created that loss, all the senior ones of whom of course have been fired or have left the bank, would have suffered even more financially than would have been the case. So I believe 100% in alignment of people with the results that they are charged to make. However, the task that I was given when I came in a year ago, when I was asked to take this job, is how do you take a bank in the state that you describe, a loss-making bank, and recover it and along the way allow the taxpayer to close future budget deficits by some £45 billion if we are successful? In order to do that, that is in some ways a more difficult job than just running a bank, because you are needed to actually turn the bank around as well as compete day in, day out, as well as serve your customers, so I needed to fire a lot of people who were associated with the past and hire some new people. I needed to keep the best of our people and have them motivated for this difficult job. If I had gone to people that I needed to hire and said, "Here, come to RBS. Take a more difficult job and be treated worse than in your current job or anywhere else," I would not have hired very many people or persuaded people to stay. So this is really the balance of making sure that there is accountability for the staff.

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