Examination of Witness (Question Numbers
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,
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 politicsI
use the word with a small "p", including the media and
everythingboth 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
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 madeand,
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
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 importantnot for
this reason, by the way, but for public policy reasonsis
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 jobI did not apply for itthe
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
Q15 Chairman: Can you write to us
Mr Hester: I would be happy to
do that, yes.
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 doand
I think other banks do the same but obviously I can only talk
for usis 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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