2 Northern Ireland's banks: a block
to recovery?
Background
4. When the economy of the Republic of Ireland grew
spectacularly from the mid-1980s onwards, much of the extra wealth
generated within the banking system was diverted into property.
The resulting boom affected both commercial and residential property
prices so, when the property bubble burst in the wake of the 2007-08
financial crisis, it left Irish banks highly exposed to bad debts.
The Irish Government, seeking to avoid banks failing, made generous
guarantees to bank creditors, resulting in a banking problem which
exacerbated significantly Ireland's financial crisis of late 2010.
5. Banking sector problems were specifically severe
across the island of Ireland due to aggressive property lending
and too many short-term, over-ambitious acquisitions of property.
Traditional lending values were lost sight of in the light of
over-ambitious lending targets and poor housekeeping, and were
swept away in the scramble for growth, resulting in many of the
banking sector failures.
6. There are close economic ties between the UK and
the Republic of Ireland, with the relationship between Northern
Ireland and the Republic being especially close; in its document
Rebalancing the Northern Ireland Economy, published in
March 2011, HM Treasury estimated that 28 per cent of exports
from Northern Ireland went to the Republic.[3]
These ties led to the UK Government lending the Republic of Ireland
£3.2 billion at the beginning of the crisis. As Sajid Javid
MP, the then Financial Secretary to HM Treasury, told us in evidence:
… one of the key drivers for the UK making
that loan available was the integration of the economy of the
Republic with the rest of the UK, but in particular with Northern
Ireland. Part of our motivation was that it was in our own economic
interests that the Republic has a speedy recovery from its economic
problems.[4]
The banks' current positions
7. None of the four major retail banks in Northern
Ireland (Bank of Ireland, Danske Bank, First Trust Bank and Ulster
Bank) are headquartered in Northern Ireland. First Trust Bank
and Bank of Ireland are subsidiaries of Dublin-based banking groups,
Danske Bank's[5] parent
is based in Copenhagen, while Ulster Bank's Head Office in Belfast
reports to Royal Bank of Scotland's Headquarters in Edinburgh.
In its memorandum, IBOA The Finance Union,[6]
which represents financial services sector staff in both the UK
and the Republic of Ireland, stated:
The distance between the board rooms where key
decisions about credit and risk are made and the areas in Northern
Ireland affected by them is a further concern-especially as many
banks with international interests have retrenched to their home
markets since the crisis began. Without the intervention of local
public representatives, this trend may have been more pronounced
in Northern Ireland.[7]
8. Although being part of a larger group has advantages
in matters such as access to capital, etc, a parent company will
always be able to influence a subsidiary's decision, usually in
view of the PLC status of the parent, and the banks in Northern
Ireland are no different in this regard; local management may
be set targets or policy parameters by the parent, and they do
have responsibility for the delivery of growth and profit aspirations.
The most important aspect at local level is that they are the
interface with the customer.
9. Since Danske Bank completed its takeover of Northern
Bank in April 2006, it has closed branches in some rural towns,
reducing the total from 72 branches across Northern Ireland in
April 2012 (under Northern Bank) to 53 branches under Danske Bank.
The Bank appeared to have more of an emphasis on online banking,
hence the branch closures, but there had been considerable concerns
that elderly, and rural based, former Northern Bank customers
now would have to travel long distances to access an alternative
branch.[8]
10. The banks in Northern Ireland are re-examining
their position in the market and the need for extensive branch
networks. In order to facilitate branch closures, Northern Ireland's
banks have entered into specific arrangements with the Post Office
to meet the needs of those customers who were previously dependent
on their local bank branch.[9]
In its memorandum, the Post Office also states that it has 484
branches in NI, around 330 of which are in rural locations.[10]
11. The situation concerning branch closures would
have been exacerbated if reports from July 2013 that Ulster Bank
was planning to close up to 40 branches across the island of Ireland
by the end of 2014 were accurate,[11]
although the then Finance Minister, Sammy Wilson MP MLA, said
that he had been assured that the number of Northern Ireland branches
closing would be in single figures, and over a longer period of
time.[12]
12. Under the plans, Ulster Bank would close many
mainly rural branches and reduce staffing levels. It would keep
open 175-185 branches, down from the current 214 (and the 238
branches in 2012) number. The remaining branches would be focused
on urban centres, with the Bank investing in its internet banking
service to increase online usage. Of Ulster Bank's, approximately,
5800 employees, some 1800 were expected to leave, which the bank
hoped would be through natural wastage.
13. In its memorandum, the Consumer Council for Northern
Ireland (CCNI) said that:
With 53 bank branch closures ... during the past
two years and further closures on the horizon, the Consumer Council
is concerned about the level of access that consumers will have
in order to carry out daily banking activities in Northern Ireland.
The number of branches of big 4 banks have reduced from 252 to
199 (21%) in the last 2 years. This matter affects all consumers,
regardless of the bank they use. Rural areas appear to be particularly
affected.[13]
14. The Ulster Farmers' Union echoed the CCNI and
considered that the farming community would be particularly hard
hit by the closure of rural branches for two reasons:
First, there is a loss of understanding of the
business ... For a bank to understand a business, it needs to
understand the dynamics of agriculture, so it needs to be in that
area. One of our biggest problems is the ability of people in
a head office in Belfast to understand the dynamics and the long-term
investment that farmers make ... The other thing is that the average
age of farmers is probably higher than that in many other sectors.
Therefore, farmers rely on their local branch as the main point
of contact for doing business. We are concerned that the loss
of local branches could have the opposite of its intended effect.
There could be more reliance on cash transactions, which would
expose elderly people who were holding more cash to criminality.[14]
15. In the written submission from IBOA, it was stated
that:
... Bank of Ireland has committed to close the
fewest locations of the four major banking groups. Since the onset
of the crisis, it has closed nine offices and sub-offices in Northern
Ireland. However, although it may maintain a presence on most
of its existing sites, the Bank's "new branch model"
is built on customers accessing services through a battery of
electronic devices (monitors, ATMs and dedicated phone lines linked
to a call centre) rather than by face-to-face interaction with
bank workers.[15]
16. In July 2014, Ulster Bank announced the closure
of five branches in Northern Ireland, two within Belfast itself
and a further three within a 10 mile radius of Belfast. They also
announced the closure of six branches and three sub-branches in
the Republic of Ireland.[16]
17. Maintaining a branch network at the current level
will always be a challenge for the banking sector in Northern
Ireland, and the viability, or otherwise, of each individual branch
or sub-branch has received much closer attention in recent years
as a result of the unsatisfactory trading performance of each
of the banks.
18. As in Great Britain, advancement in the area
of IT has also meant a greater use of Internet banking and a reduction
in the footfall at branch level. This will continue to be an issue
and whether, or not, other providers, for example, the Post Office,[17]
will fill the gap left in the market will be watched with interest
over the coming years.
19. Branch closure
is not, of course, unique to Northern Ireland, but it is a matter
of particular concern to us. We regret that Northern Ireland's
Banks have shown such little thought towards its customers by
seeking to either concentrate its branches in the major centres
of population, or to close branches in favour of online banking,
although the Post Office, for example, may be able to fill in
some of the gaps in the market.
Banks as an aid to economic recovery
20. When considering the banking structure in Northern
Ireland, a fundamental question that has to be asked is whether
the economic recovery in Northern Ireland is being encouraged,
and suitably served, by the banking structure currently available
to the Northern Ireland customer base. When the CBI NI appeared
before the Committee on 20 November 2013, its Chairman appeared
to have little doubt that the banks were not playing their part,
stating;
... when I became Chairman nearly two years ago,
the biggest risk factor and the key blocker to the Northern Irish
economy was to my mind our banking situation. I do not think that
has changed; it remains the biggest single risk factor and the
single biggest blocker to growth in Northern Ireland today.[18]
21. When the Committee took evidence from the four
main Northern Ireland banks, we offered them the opportunity to
respond to the critical view that had been expressed by the CBI.
Bank of Ireland said that:
It is our view … that we have sufficient
capital and liquidity to support lending into the Northern Ireland
region … Our view is … that the biggest issue facing
the economy is a lack of demand for credit, rather than supply.[19]
22. Danske Bank's response was that their understanding
was that:
the risk factor for future growth is the fact
we have legacy debt problems … which may constrain the ability
of a large part of our SME sector to borrow and grow in a healthy
way.[20]
Danske agreed with the Committee's suggestion that
the CBI's criticism was not so much aimed at individual banks,
but reflected the realisation that the banking problems, particularly
those that were property-related, would have an impact on business
confidence.[21]
23. Ulster Bank said that it had been supporting
sectors such as agriculture, food, services and natural energy,
which had been doing well. However, "we still have the property
issue to deal with, but in terms of the fundamental economy, we
have been supporting those areas that are the backbone of Northern
Ireland."[22]
24. First Trust Bank stated that its approach was
about engaging with customers when they get into difficulty as
they wanted "to protect jobs and we want to put businesses
on a firm, commercial, but, most importantly, sustainable path
for the future."[23]
The Tomlinson report
25. In November 2013 Lawrence Tomlinson, the Entrepreneur
in Residence at the Department for Business, Innovation and Skills,
published his report on banks' lending practices.[24]
The report focussed on the evidence he received about the Royal
Bank of Scotland's (RBS') turnaround division, the Global Restructuring
Group (GRG). He was concerned by what he saw as patterns of behaviour
leading to the "destruction" of good and viable UK businesses,
and called for further investigation into this behaviour by the
appropriate authorities and immediate action to stop such treatment
of businesses.
26. The report suggested that there were occasions
when RBS engineered a business into default in order to move the
business out of local management and into GRG. This then generated
revenue for the bank through fees, increased margins and the purchase
of devalued assets by their property division. Once in GRG, according
to the report, the business was then trapped with no ability to
move or opportunity to trade out of the position.
27. As Ulster Bank is part of RBS we were, naturally,
very interested to hear whether any of the accusations made against
RBS were also being levelled against Ulster Bank. Simon Hamilton
MLA, who had replaced Sammy Wilson MP as the Minister of Finance
and Personnel, told us that there was no hard evidence that Ulster
Bank was behaving in a similar way; if there were any accusations,
then:
… it would be anecdotal evidence. My Department
and, indeed, the Enterprise Minister's Department would regularly
be contacted by businesses who would be reporting what, on the
face of it, would appear to be sharp practice on the part of not
just Ulster Bank but all banks. Indeed, we would have some anecdotal
evidence of some of the issues that were revealed in Lawrence
Tomlinson's report happening in Northern Ireland as well …
Nothing has come across my desk in the last couple of days, but
my colleagues in DETI have had a few more companies come forward
as a result of the news to say, "This, or something similar,
has happened to me as well." The answer is we do not have
any hard evidence of it …[25]
28. When we took evidence at Stormont from the Chairpersons
of the Northern Ireland Assembly's Committees for Finance and
Personnel and for Enterprise, Trade and Investment, reference
was made to the Tomlinson report and we were told by Daithí
McKay MLA, Chairperson of the Committee for Finance and Personnel,
that two case studies in particular:
… highlighted viable businesses and individuals
with assets that were not having existing loans renewed but instead
were getting increased interest rates and increased fees-so, banks
were, effectively, engineering a default, as Tomlinson stated,
and acquiring readily available assets.[26]
29. Responding to the points raised in the Tomlinson
report, Ulster Bank stated that when his report came out "to
the best of our knowledge there were no cases, or he {Mr Tomlinson]
had not engaged with Ulster Bank at all in terms of the process".[27]
30. In January 2014, RBS appointed Clifford Chance
LLP to undertake an independent review of the central allegation
made in the Tomlinson report that the bank was guilty of systematically
setting out to defraud its small business customers. Clifford
Chance, however, concluded that there was no evidence to support
the allegations.[28]
In May 2014, Ulster Bank responded to allegations made in a BBC
television programme, Spotlight, that it had forced viable
businesses into bankruptcy, by saying the Bank found "the
airing of these allegations troubling given the independent report
by Clifford Chance, which found no evidence to support the most
serious allegations made by Tomlinson or any other evidence of
misconduct."[29]
31. Whilst the
Tomlinson report may have uncovered some disturbing facts about
banking in the UK, it was most unsatisfactory that Ulster Bank
were not given the opportunity to comment. However, Ulster Bank
were given the opportunity to put its side of
the story by responding to the Spotlight allegations, but
refused to do so, stating their concern over the possible legal
implications on commenting publicly on one particular case which
was the subject of court action.
32. Whilst we
accept that customer confidentiality is uppermost in any bank's
decision whether, or not, to respond to media articles or items,
we believe that the Bank could have responded without going into
specifics. The fact that Ulster Bank refused to take part in the
Spotlight programme and, instead, simply rehearse
its own commissioned report, could not fail to give the impression
that the Bank may have had something to hide.
3 HM Treasury, Rebalancing the Northern Ireland economy,
March 2011 Back
4
Q841 Back
5
Before November 2012, Northern Bank. Back
6
Formerly known as the Irish Bank Officials' Association. Back
7
IBOA The Finance Union (BNI0015) para 3.2 Back
8
Q39 Back
9
The Post Office Limited (BNI0013)
Back
10
The Post Office Limited (BNI0013) para 3.1 Back
11
BBC News, 'Ulster Bank to close 39 branches as hundreds of jobs cut',
3 July 2013 Back
12
BBC News, 'Ulster Bank to close 39 branches as hundreds of jobs cut',
3 July 2013 Back
13
Consumer Council Northern Ireland (BNI0019) para 24 Back
14
Q443 Back
15
IBOA The Finance Union (BNI0015) para 2.10 Back
16
BBC News, 'Ulster Bank to close five branches in NI', 1 July 2014 Back
17
The Post Office Limited (BNI0013) Back
18
Q264 [Mr Coulter] Back
19
Q516 Back
20
Q559 Back
21
Q560 Back
22
Q669 Back
23
Q749 Back
24
Lawrence Tomlinson, 'Banks' Lending Practices: Treatment of Businesses in Distress',
November 2013 Back
25
Q327 Back
26
Q415 [Mr McKay] Back
27
Q694 Back
28
Clifford Chance LLP, Independent Review Of The Central Allegation Made By Dr Lawrence Tomlinson In Banks' Lending Practices: Treatment Of Businesses In Distress,
11 April 2014 Back
29
Belfast Telegraph, 'Ulster Bank: We never preyed on struggling businesses',
15 May 2014 Back
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