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

Examination of Witness (Question Numbers 220-239)


12 JANUARY 2010

  Q220  John Mann: I am asking you about since you took over HBOS, because that is a good time frame to take. So the 11,000 or the 15,000 might be accurate?

  Mr Daniels: I would not wish to speculate but I will be happy to write to the Committee—

  Q221  John Mann: I am not asking you to speculate. All I am asking is how many jobs have gone since you took over HBOS?

  Mr Daniels: At mid-year we reported 6,000 role losses, not job losses, and we would be reporting again at the end of February and at that time we will give the next figure.

  Q222  John Mann: What is your estimate then that at the end of February the figure will be?

  Mr Daniels: I am afraid we do not disclose those estimates.

  Q223  John Mann: So you know but you are not going to tell us how many jobs. Is that what you are saying?

  Mr Daniels: We would not be allowed to publicly disclose. We are in a closed period.

  Q224  John Mann: So the union's figure of 15,000 may well be accurate then?

  Mr Daniels: I could not possibly comment.

  Q225  John Mann: How many more do you project in the next year, job losses, role losses?

  Mr Daniels: If I may, the way in which we operate is that we believe we take the commitments to our staff very, very seriously, and what, again, we believe is that we cannot build a successful franchise unless we bring the staff with us. As a result of that, what we do is we look very thoroughly, department by department, and make a decision about the ideal staffing level for that department. That requires a great deal of work; it requires careful study. Once we understand that, we then speak to the individuals involved. We do not think it is a good policy to make public pronouncements when people's livelihoods are at stake and when individuals are affected. We will always speak to the individual first. We then try and make every attempt to make sure that that individual, if they have performed well, gets another job within the company. Again, we have natural attrition where people decide they want to do other things, so backfilling natural attrition from some of the people who have lost their roles is a very good thing. Using a single gross measure of number of roles eliminated does not say anything about what happens to people.

  Q226  John Mann: The taxpayer might want to know how many jobs have gone. Have you sent any functions abroad, offshore, in this period since you took over HBOS?

  Mr Daniels: No. We have committed that we will not offshore any further jobs since we took over HBOS.

  Q227  John Mann: So nothing has gone offshore?

  Mr Daniels: That is correct, and in fact, we are bringing back from offshore some functions.

  Q228  John Mann: You seemed to say contradictory things to the Chairman and earlier on, I think it was to Mr Cousins, in terms of bonuses and synergy. Earlier on you were suggesting that synergy savings are one of the three parts of the bonus determination but job cuts are part of the synergy savings, but you told the Chairman that there was no relationship between job cuts and bonus. That seems to be a contradiction. Does synergy have any relationship of any kind to bonus?

  Mr Daniels: I beg your pardon. If I may clarify, I explained that there are three components to compensation: there is salary, there is bonus, and there is long-term compensation. One of the three pieces of long-term compensation is determined by whether we hit the 1.5 or greater of synergies or not, and how we hit it. In other words, we have to do it so that it really adds lasting value to the shareholder. The Chairman asked me whether we would get in fact a greater bonus for cutting more people and I said the answer is no.

  Q229  John Mann: But there is then a direct relationship between the synergy savings and part of the bonus, and therefore you have linked the reduction in labour costs, i.e. jobs, with bonus directly.

  Mr Daniels: There is a direct link between achieving the synergy target and receiving a component of the long-term compensation. That is absolutely true. The link between the number of roles and the synergy savings is, I believe, a lot less direct. When we make savings—for example, we procure about £5 billion of goods and services every year, everything from photocopying machines to pencils to renting branches and so on. Because we are a larger group, we purchase more in volume, you would expect that we would achieve larger discounts. When we combine computer systems—

  Q230  John Mann: I understand that. My final question is, you are trying to persuade the British taxpayer, not least as current and future potential customers, and yet you are linking part of your bonus to job cuts, and you are unwilling to say how many job losses there are. Does that not create something of a PR problem for you in persuading the British public that you are a suitable person for them to put their money into?

  Mr Daniels: I am not sure I completely follow the logic but let me try once more. What we believe is that when you bring together two organisations there will be—regrettably but inevitably—some job losses, and those job losses will result in some savings. If we in fact increase the amount of savings, increase the amount of job losses, no, the bonus will not be any larger or less large. What we are committed to is, we have made a series of representations to our shareholders about what we think the size of the synergies are and the management may or may not be bonused or given long-term compensation based on how well we—

  Q231  John Mann: But if you do not get through the agreed job losses, your bonus will be cut and therefore there is a direct relationship between the bonus payments that you are making, despite the position of the taxpayer in relation to your bank, and the job cuts that you are making. Do you not feel you have a problem? You are obfuscating in actually putting the information out. Is there not a problem with the British taxpayer seeing that you are paying bonuses for people to cut jobs?

  Mr Daniels: I beg your pardon. I have tried at least two times unsuccessfully to explain it. Would you like me to try a third time?

  John Mann: I have heard your explanation, and you are saying that.

  Chairman: I do not think we are getting anywhere. You have explained it three times, John has come back four times, so we will call it a draw.

  Q232  Nick Ainger: Can you explain to the Committee why your senior management, including yourself, needs a substantial bonus to successfully complete the merger of these two organisations? You are extremely well paid. Last time you were before us you referred to your salary as modest. It is not, but can you explain why you require this bonus, however it is to be calculated, to actually do what I would have thought should have been part of your everyday work?

  Mr Daniels: Thank you for the question, Mr Ainger, and thank you for the opportunity to clarify my previous statement. I told the Committee that I feel incredibly privileged to be able to lead the Lloyds Banking Group, and I by no means mean to imply that I believe that my salary is modest. The point that I was trying to make before and that I have, I hope, made today in response to Mr Todd's question is that the great majority of our employees in fact look like the nation; they have £25,000 salaries and they have £1,000 bonuses, and that is what the great majority of what Lloyds banking is about.

  Q233  Nick Ainger: We understand that. It is the Board. Surely their responsibility is to make this merger a success, therefore, why on earth do they require a bonus to achieve that?

  Mr Daniels: Again, if I may distinguish, the Remuneration Committee of the Board sets the compensation for the management, including the senior management of the Lloyds Banking Group. What they believe is, if you achieve specific goals that add value to the shareholder, and you achieve them well and above expectation, that is worthy of recognition. I think that is what the driving force is behind it. Again, I would remind you that the kind of compensation that we are talking about is not investment banking compensation. We are a bank that serves customers. What we do as a commercial bank is to give first-time buyers mortgages, it is to help companies borrow so that they can grow and expand. That is what we do.

  Q234  Chairman: As you know, the Committee has always been concerned about fairness and financial inclusion, and I have received quite a high degree of correspondence from individuals all over the country on the current account issue. I have written to you on that and you have come back to me. Just let me give you an example, because I think there is an issue of perception here. "Dear Mr McFall, I thought you could pass this information on to the relevant body, using your clout," so this is what I am doing. "My 84 year old mother, I look after her finances and I have just read that a new charging structure includes a £1 a day charge for any unauthorised overdrawn amount of from £1 to £2,499. Such a charging structure is biased against low-earning account holders who are most likely to go overdrawn at the end of the month, or people like my mother, aged 84, who has become a bit forgetful." I had one from a 72-year old in St Boswells, saying, "The bank boasts that up to £2,500 in overdraft will only cost £1 per day, ignoring the plight of small borrowers who expect to pay overdraft charges in proportion to their borrowing and whose charges are still profit for the bank on a smaller scale." I have just done a back-of-envelope calculation. It seems as if the charges are not proportionate to the amount borrowed. For example, £2,500 has an APR of just under 15% whereas an overdraft of £200 would attract an APR of well over 1,500%. In fact, I calculated 1,825%. How are you going to justify those sorts of rates and dispel the perception that it is the low-income people that are being penalised here?

  Mr Daniels: Thank you for the question, Chairman. You have a faster calculator than I do so I could not verify whether those rates of interest are right or not.

  Q235  Chairman: We will ask you to confirm that when you come back again. OK?

  Mr Daniels: What I would tell you is that what we try and do is offer a wide variety of accounts so that customers can choose the one that is most appropriate for them. For those people, for example, who very occasionally fall into an overdraft because they have a particular need that month, they would use a different product than people who dip in and out of overdraft on a fairly frequent basis. What we try to do is design products that are appropriate for the customer. In part what we do is we try and price the amount of the overdraft by the amount of risk that is incurred, and that is a very risky product as far as the bank is concerned, and the amount of cost that is incurred because the overdraft decisioning is reasonably complex. That is how we price our products, and we of course want to get a return. What I would tell you is that the overdraft product is one of the lower return products that we have.

  Q236  Chairman: I think there is a view out there, Mr Daniels, that it is punishing low-income people and HBOS has been pretty good over the years on the issue of financial inclusion. In fact, you had a separate financial inclusion report a number of years ago and I contributed, so I would not like to see that going by the board. If you could take that away and look at that so that you could get that public message out that you are not disadvantaging people, it would be in everyone's interests.

  Mr Daniels: Thank you, Chairman. I can assure you that we believe very thoroughly as the Lloyds Banking Group that financial inclusion is important for society and important for our bank, so I absolutely take it to heart.

  Q237  Chairman: Just two questions to finish with, just for the record. Chris Rhodes, the Head of Products and Marketing at Nationwide, has complained to the Treasury and the FSA that partially state-owned banks such as Lloyds are causing, in his words, "dislocations" in the savings market through pricing their products uneconomically. Do you have any sympathy for that view?

  Mr Daniels: I can assure you that if I priced products uneconomically, my shareholders would crucify me.

  Q238  Chairman: When you appeared before us in February 2009 you said that your time frame for exiting state ownership and repaying the taxpayer would hopefully be less than three years. Almost one year has passed now since you appeared before the Committee. Do you still expect to be fully privately owned by early 2012?

  Mr Daniels: That is a question that I think UKFI would be in a better position to answer. My job is to try and make the bank as successful as possible, meaning that we in fact can increase the profitability, increase the share price, and assure people that this is not simply a temporary increase but rather it is sustainable over time, and that is what will get the share price up. In fact, as the share price rises, the ability of the government to sell down its shares at a profit increases and is enhanced. That is what we seek to do.

  Q239  Chairman: I was taken by a quote which one of your friends was supposed to have made to the newspapers.

  Mr Daniels: I apparently have lots of friends!

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