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

Examination of Witness (Question Numbers 120-134)


12 JANUARY 2010

  Q120  Mr Todd: So what do UKFI do if the Treasury are effectively your owners in this matter?

  Mr Hoffman: Treasury are the funders and UKFI is the governance mechanism. So I agree—

  Q121  Mr Todd: Is there a meaningful distinction?

  Mr Hoffman: Yes, I think there is, in that I agree the strategy with UKFI and agree our plan and agree our 2010 operating plan with them, for example.

  Q122  Mr Todd: Has the break-up and potential sale of the new bank been driven by the Treasury or yourselves?

  Mr Hoffman: We have been focused on the legal and capital restructure, and although we have been doing that in order to prepare for private ownership, I have not been asked to work to a deadline on the sale.

  Q123  Mr Todd: No, I did not ask that. The strategy of breaking up the business and preparing one side of it for sale, was that driven by the Treasury or was that your own management team's proposal for how to resolve the issue of repayment?

  Mr Hoffman: It was the company's recommendation to the Treasury and to the Shareholder Executive.

  Q124  Nick Ainger: In your memorandum to us you tell us that in 2009 there were no pay rises or bonuses paid to executives or senior management. Did that affect recruitment or retention at this level of management?

  Mr Hoffman: I think we have come through 2009 well, despite the difficult circumstances in the market and despite the difficult recruitment market. I would say that Northern Rock has now become more attractive to people because they realise we are on a journey. When people join us now, people will either not come to Northern Rock because of the uncertainty or they are fascinated by it because of the journey. So I have been able to recruit—

  Q125  Nick Ainger: I understand that but my question was, we are being constantly told that unless banks pay bonuses, they do not retain and cannot recruit staff. Your experience in 2009 was that at senior levels you did not pay any bonuses, you did not actually pay any pay rises. I just wondered: was there an impact?

  Mr Hoffman: Yes, frankly, there was an impact, in that—and clearly I cannot mention names but there were a number of senior people that I would have liked to attract that in the end I could not attract.

  Q126  Nick Ainger: But did it result in people leaving?

  Mr Hoffman: There have been some senior people who have left. As always, I do not think that is only down to pay. I think people leave companies for lots of reasons. One of those is pay.

  Q127  Nick Ainger: In 2010 do you intend to start paying bonuses again, and have you any idea how many staff will be receiving over £25,000 and therefore the company will have to pay the bank payroll tax?

  Mr Hoffman: We have agreed with the Board and with our shareholder that there would be an incentive scheme for 2009. We have been set some targets and if we were beating those targets substantially, then an incentive scheme is likely to pay out. Clearly, we do not have the annual results yet so we are waiting for those annual results. The vast majority of our people of course—I have 4500 people—are employed in Newcastle and Sunderland and are on salaries of around £20,000. These are not City bankers and they have done a fantastic job in rescuing ... As Mr Cousins will know, in the North East the connection we have to the community and customers that we serve is very strong, so I think they have done a fantastic job in getting here. It has not been decided whether they would get a bonus but they are eligible to do that. In terms of senior people, yes, there is an incentive scheme. We were the first to recommend, I think ... Even before G20 and before FSA guidelines, we were clear in recommending that if there were to be an incentive scheme, then we would have to recognise that we have received substantial monies from taxpayers, we have to make sure we are connected to customers, we have to deliver performance that would be better than the targets the government would expect, they would be deferred over three years, they would be subject to clawback, there would be no reward for failure, it would be dependent on company performance as well as individual performance—that is a long way of saying there is an incentive scheme but it is not clear yet at what levels that might pay out.

  Q128  Nick Ainger: Would you expect some people to be receiving in excess of £25,000 and, if that is the case, has the bank payroll tax influenced the decisions that you have been making in relation to the incentive scheme?

  Mr Hoffman: It has yet to be decided whether senior people would receive a bonus but if we have substantially beaten the financial and customer targets that have been set, then there is a possibility that some people would receive over £25,000. Of course, under those circumstances we would pay the bonus tax, and that would influence our thinking on the company performance because it affects the company performance.

  Q129  Chairman: When will Northern Rock PLC be profitable?

  Mr Hoffman: I am not going to give you a profit forecast. I should not give you that but what I can say to you is that we made a £1.4 billion loss in 2008, you will recall. The performance in 2009 will be substantially better than that. Although loss-making, I think we will show very encouraging results when we announce in March, and we are on the right trajectory. I think because Northern Rock PLC is very well capitalised and very liquid, it will make attractive returns in due course to a potential private owner.

  Q130  Chairman: What are the arrears ratios for each of your separate banks?

  Mr Hoffman: In Northern Rock PLC there are no arrears, so, to be very clear and blunt about it, we chose the assets that could go into Northern Rock PLC alongside the deposits, the £19.5 billion of deposits that we have, in order to minimise the investment by the taxpayer, so there are no arrears. In Northern Rock Asset Management PLC, where there are 400,000 mortgage customers, our arrears rate at the end of September three months plus arrears was 4.11% and that has stabilised in the second half and particularly, I can add, in the final quarter. What I can also say is that we have worked very hard. You will remember when I was here in November 2008 I had questions about is Northern Rock aggressive on repossessions. We have worked very hard on our debt management, on our forbearance and making sure that we listen hard to what our customers are saying and to what the debt advice agencies and the government is saying. We have worked closely with the government on the homeowner support scheme. On average we would work with customers for 15 months before we would move to repossession. Our repossession stock has fallen from over 4,000 to around 2,000 and we have kept 1,700 customers and their families in their homes in 2009 given the policies we have put in place compared to the policies we had in place the last time I was here. So I think we have worked very well with customers in order to recognise the financial difficulty that they might be in.

  Q131  Chairman: How much is that above the rest of the market? Is that over 2% the rest of the market in arrears?

  Mr Hoffman: I think the CML number would be something like 2.5%. I need to be clear, of course, that you would expect our arrears to be higher given what the book is. We have talked before about Together. Together arrears are 6.89% so it is Together that drives that. Together is a third of the book, it is half of the arrears and it is two-thirds of repossessions. So we are dealing with that legacy, if you like. I had a roundtable with the debt advice agencies up in Newcastle a couple of weeks ago and they were very complimentary about the work we have done in the last 12 months to make sure that customers keep in their homes whenever they can and that repossession is absolutely the last resort. I get letters from customers now saying—of course, I get letters from customers complaining occasionally but I am pleased to say I get letters from customers saying that they think we have worked to keep them in their house, even sometimes when they thought they would have to leave. 40% of our repossessions are voluntary. Even some of those we have managed to keep in their homes when customers did not think they would.

  Q132  Chairman: Were you to remain independent for a longer period of time, would you consider moving into other forms of lending such as personal banking and credit cards?

  Mr Hoffman: Under government ownership? No.

  Q133  Chairman: Is there a case then for widening your product offering to increase competition in the market?

  Mr Hoffman: If and when we return Northern Rock PLC to private ownership, I think the market is over-consolidated, I think the Northern Rock brand has survived very well, I do think we have the capability to extend our product range, I think a potential purchaser of Northern Rock PLC would see us as a platform to do that, and I think that would be good news for an over-consolidated UK financial services market.

  Q134  Chairman: But not at the moment.

  Mr Hoffman: But not at the moment, in part because we receive lots of state aid; we are grateful for that and we have to make sure that we do not distort the market. There are things that the Commission would not let us do. We are not allowed to acquire businesses, for example.

  Chairman: Mr Hoffman, thanks very much for your evidence and for following up the issues which we raised at the last meeting.

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