Examination of Witness (Question Numbers
12 JANUARY 2010
Q101 Chairman: Mr Hoffman, welcome to
the session. Apologies for having kept you waiting but it is a
heavy evidence session today. Can you introduce yourself for the
shorthand writer, please?
Mr Hoffman: My name is Gary Hoffman.
I am Chief Executive of Northern Rock.
Q102 Chairman: We finished our last
session in November 2008 with you promising to come back to talk
about competition in the North East. That competition framework
is working well in the North East and nationally. Can you expand
on that pregnant question, please?
Mr Hoffman: Absolutely, Chairman.
As you say, I was last here in November 2008 and I think Northern
Rock has made good progress in its rehabilitation since then.
We have just, as you will know, completed our legal and capital
restructure. That was completed over the year-end. There were
three objectives of that. The first was to make sure that taxpayers'
investment in Northern Rock was minimised. The second was to ensure
that we grow to success and help with the mortgage market rather
than shrink to success, which you will recall was the story of
2008. The third is to prepare for return to the private sector.
The legal and capital restructure is about those three things.
I will just expand on all of those three, if I may, briefly.
Q103 Chairman: Briefly.
Mr Hoffman: On the first one,
it is over two years, of course, since the original problems at
Northern Rock. It was taken into temporary public ownership in
February 2008, given a large loan by the Government, taxpayers'
money, of £29 billion, made good progress on repaying that
loan down to around £15 billion during 2008, and then in
August it was recognised that it was not just cash, not just running
out of petrol, but it was a profitability and a capital problem.
The Government announced that it would have to invest up to £3
billion of capital, of shareholders' funds, into Northern Rock
in August 2008, and that was of course before the world fell apart,
Lehman's and everything else, in October 2008. So there was a
real danger that the investment in Northern Rock would have to
be considerably more than the £3 billion earmarked in August
2008. Following my appearance at the Treasury Select Committee
in November 2008 we worked on a revised strategy, which we have
just implemented, in terms of restructuring the company and I
am pleased to say that we have minimised the investment because
the amount of capital going into Northern Rock on 1 January 2010
is £1.4 billion, so a lot less than the £3 billion,
even though the world fell apart afterwards. So that is the first
objective, and we think we have met that well. The second was,
you will remember during 2008 we were trying to shrink to success,
so we were aligning repayment of the government loan and active
redemption, as it was called, encouraging customers to leave Northern
Rock, pay off their mortgages early and go to competitors, and
using that money to repay the loan. That had, of course, a good
impact on reducing the loan but it had an impact also on the mortgage
market. It took capacity out of the mortgage market considerably.
So we were asked by the Government to work on a new strategy that
enabled us to grow to success and I am pleased to say that they
asked us to lend £4 billion in 2009 and we have met that
target. So we have begun to grow to success again. The third objective,
return to private sector, there is no timetable for this, no deadline,
but in restructuring the company into Northern Rock PLC, which
is a small savings and mortgage bank, very well capitalised, very
liquid, that I think will be attractive to private investors in
due course, and in Northern Rock Asset Management, which is the
old company, which has the majority of mortgages and no savings,
that will repay the government loan, albeit over an extended period.
In summary, I think we have made good progress against the objectives.
I think Northern Rock has rehabilitated itself well. The Northern
Rock brand has been very resilient.
Q104 Sir Peter Viggers: You say the
Government set a timetable but in fact there are predators already
circling, are there not, preparing to make a bid? Who will decide
on the timing of a transfer to the private sector?
Mr Hoffman: The Government. Clearly,
we work closely with the Government on it. They have set no deadline
to me. All they asked me to do is to make sure that the return
to taxpayer would be done at some time and that we minimise the
amount of investment. Yes, there have been some informal discussions.
You would expect that. People have been talking but there have
been no formal discussions and there is no timetable and no deadline.
I suppose there is no good reason why you would rush to do it,
I think. We should make sure that we maximise the value to taxpayers
when that transaction is done.
Q105 Sir Peter Viggers: You used
the word "rehabilitation" of the Northern Rock brand.
How damaged do you think the brand is?
Mr Hoffman: That is a good question.
If I were sitting here two years agoand of course, I was
outside Northern Rock two years agoI would have worried
whether the Northern Rock brand would survive. We were all worried
about that but I think it has proved to be resilient, in large
part due to the fantastic work of my 4,500 colleagues. I think
they have done a great job in very difficult circumstances. As
you know, they are based in Newcastle and Sunderland and up and
down the country. When I speak to customers, which I do most days,
they are pleased that we have survived. I am not saying we are
prospering yet but I think we are on a good trajectory, and I
think the Northern Rock brand can be a force to be reckoned with
in the UK financial services market in the future, and I am pleased
Q106 Ms Keeble: I just wanted to
ask, do you still need the savings guarantee or do you think that
it is time to let that go given the improvements in your position
that you have described?
Mr Hoffman: I am pleased with
the progress we have made. The restructuring now enables the government,
our shareholder, to review whether that guarantee remains in place.
I should emphasise it does remain in place. They are reviewing
it. In part, they are reviewing it because we have made progress
and because the Northern Rock PLC bank is a well capitalised,
very liquid bank. Our customers' money is very safe with us now
and will be in the future.
Q107 Ms Keeble: Obviously, presumably,
the guarantee has somewhat distorted the market because you have
attracted some people to you. Would you positively say that you
think the government should not now just review it but should
remove it, so that you are back on a level playing field with
Mr Hoffman: There was a study
by the Office of Fair Trading that concluded that we had not distorted
the market and of course, we have operated within a self-imposed
competitive framework, making sure that we do not appear in the
"best buy" tables, because I am very conscious for my
competitors that we benefit from
Q108 Ms Keeble: Can I ask you again:
do you think that the government should just remove the guarantee?
If, as you say, it is not effective and you do not need it, do
you think it should now be removed?
Mr Hoffman: I think they are right
to review it but they will decide the timing, not me.
Q109 Jim Cousins: Mr Hoffman, I think
it probably comes as a relief to both of us that the Committee
is not very interested in you this morning. What I wanted to ask
you about, because this is always overlooked in the discussion
of these matters, is the old bank of Northern Rock, the remainder
bank that has no savings, does no new business, but a very large
number of peopleperhaps you would like to tell us how many
it could be, but it could well be 300,000 or 400,000 peoplewill
find their mortgages parked with the old bank. Could you tell
us what actually is likely to be the number of mortgages that
are parked with the old bank? Could you also tell us how we are
going to make sure that that very large number of people, many
of whom of course are not terribly wealthy, are going to get a
reasonable mortgage deal so that they can trade out as individuals
as well as the old bank?
Mr Hoffman: Yes, and I think I
should address that head on. People have called it "the old
bank", people have called it "the bad bank", and
I think that is an inappropriate label. It is about 400,000 mortgage
customers that are with Northern Rock Asset Management PLC. That
is the old Northern Rock. That has become Northern Rock Asset
Management PLC. The best way of describing it is that 90% of our
450,000 customers have remained in the same company, with Northern
Rock Asset Management PLC, and my job as Chief Executive of that
company too is to ensure that those customers are served brilliantly,
and the job of people working for Northern Rock Asset Management
will be to ensure customers are served brilliantly, that they
see no change. I am pleased to say that over the legal and capital
restructure at the end of the year I have written to all of those
customersI have only done that over the last 10 days. I
think we have written in a very straightforward way. We are clear
about the fact that their mortgage stays there but we intend to
serve it well. The mortgage rates in there are not the best and
they are certainly not the most expensive.
Q110 Jim Cousins: It is going to
be, in the present mortgage market, quite difficult for those
400,000 mortgage holders to move their mortgage easily anywhere
else. They are stuck with the old bank. They are stuck with the
old Northern Rock. I am extremely concerned because the geographical
distribution is skewed to northern England, those 400,000 families
represent quite a large percentage of the number of mortgage holders
in northern England, and I am concerned that they get the best
possible deal for themselves and that they do not find themselves
forgotten, trapped in an institution which is not offering them
Mr Hoffman: My objective is, of
course, to provide those customers with good service and good
deals too. I should have said that over 90% of those mortgages
are good performing mortgages, so only 5% of those mortgages are
more than three months in arrears. People talk about it as a bad
bank but it is not true. I share your concern but I will be making
sure that those customers receive a good deal and receive a great
service. I am very happy for them to keep their mortgage with
Northern Rock for the period of that mortgage, for 20 years.
Q111 Jim Cousins: Most of them will
not have any alternative. What pressures will you be under from
UKFI, the Government, to ratchet up their mortgage rates in order
to bring the Government a good return?
Mr Hoffman: No, I am not under
any pressure, and do not expect to be under pressure from UKFI
to do that. We have a standard variable rate which is 4.79%, a
loyalty rate for customers that have been with us over seven years
of 4.54%. As I say, it is not the cheapest but it is certainly
not the most expensive. That is where I expect us to be and our
customers are saying generally they get a good deal from us and
they are pleased with the service, and I expect that to continue.
Q112 Jim Cousins: Do you intend to
offer this very large number of people special rights of representation?
There has been a lot of talk about mutuality. Do you expectand
this is one way in which perhaps it needs to be doneto
create a special organisation through which the interests of those
people can be talked about directly with you?
Mr Hoffman: I talk to customers
nearly every day and
Q113 Jim Cousins: I am not referring
to talking to them individually but as a body.
Mr Hoffman: The objective of Northern
Rock Asset Management PLC is of course to repay the debt over
a period but also to serve those customers very well and give
them good deals. I do not think those things are mutually exclusive.
It is in our interests to give customers good deals and repay
the government debt, and I think we have shown so far that we
can do that.
Q114 Mr Todd: If 90% of Northern
Rock is a bad bank, what was the point of the break-up?
Mr Hoffman: To minimise the investment
by the taxpayers. What Northern Rock Asset Management has become,
and, as Mr Cousins said, it does not lend any new money so it
does not have a deposit-taking
Q115 Mr Todd: So it is really about
focus, if you like.
Mr Hoffman: Yes, and Northern
Rock Asset Management does not have a deposit-taking licence,
therefore it operates under a different regulatory regime. The
amount of capital we have to hold is a lot less.
Q116 Mr Todd: So what risk is the
taxpayer exposed to in the asset management business that you
Mr Hoffman: The remaining government
loan is in Northern Rock Asset Management and will be repaid over
time by the natural maturity of that mortgage book.
Q117 Mr Todd: Therefore one could
estimate that over a period of time based on the maturity of the
mortgages. Have you done that estimate?
Mr Hoffman: Yes, and it will take
an extended period because what we do not want
Q118 Mr Todd: When you say "extended
period", what do you mean by "extended period"?
Mr Hoffman: Up to 20 years. I
think there will be significant repayment over the next three
or four years, say 50% of it would be repaid, but then, because
we do not want to force customers to redeem, as we were in 2008,
it would be natural that if customers want to stay with us, they
can, or they can take a mortgage from Northern Rock PLC or from
any other competitor. It would be the natural maturity of mortgages
that will repay the government debt.
Q119 Mr Todd: What is the difference
between UKFI's role in this and the Treasury's?
Mr Hoffman: UKFI is now responsible
for the governance of Northern Rock alongside RBS, Lloyds and
Bradford & Bingley. So we were governed previously by the
Treasury and by Shareholder Executive. That has now been taken
over by UKFI but the loan is given by the Treasury.