Examination of Witness (Question Numbers
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
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
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
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 thatand 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 courseI have 4500 peopleare 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 performancethat 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
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 sayingof
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
Mr Hoffman: Under government ownership?
Q133 Chairman: Is there a case then
for widening your product offering to increase competition in
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.