CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 619-ii

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKING STANDARDS

(SUB-COMMITTEE A)

PANEL ON THE CONSUMER AND SME EXPERIENCE OF BANKS

TUESDAY 16 OCTOBER 2012

SME BANKING REGIONAL DIRECTORS AND RELATIONSHIP MANAGERS

RETAIL BANKING REGIONAL DIRECTORS AND BRANCH MANAGERS

STEVE COOPER, MARTIN DODD and CHRIS SULLIVAN

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Parliamentary Commission on Banking Standards (Sub-Committee A)

on Tuesday 16 October 2012

Members present:

Mr Pat McFadden (Chair)

Mark Garnier

Mr Andrew Love

Lord McFall of Alcluith

John Thurso

Examination of Witnesses

Witnesses: RBS 1, Strategic Change and Support for Business and Commercial Banking Risk, Royal Bank of Scotland, RBS 2, Managing Director of Commercial Banking, RBS, BARCLAYS 1, Senior Business Manager, Barclays, BARCLAYS 2, Director, Barclays, LLOYDS 1, Senior Manager, Lloyds Banking Group, and LLOYDS 2, Regional Director, Lloyds Banking Group, gave evidence.

Q149 Chair: Thank you all for coming today. My name is Pat McFadden and I chair this panel. I thought it would be worthwhile to set out at the beginning what we want today. We really want to understand; we are not here to reach judgments. We are engaged in the work of a Sub-Committee of the overall Parliamentary Commission on Banking, which is concerned with the SME and consumer experience.

As MPs-and one former MP-we are used to speaking to businesses in our constituencies about they how view all this and their relationships with banks regarding lending decisions and so on. It is also true that we are quite used to seeing the chief executives of banks before Select Committees reading out great, global figures about lending, which are always in billions. We wanted to do something a little different today, and not do either of those things. Rather than looking at things from the consumer’s end or from the bank boss’s end, we want to understand the relationship managers-the people who are making these decisions-and try to get a feel for lending processes within the banks. Hopefully that is of some help.

I want to start with one or two of you who are nearest to the front line, if I can put it like that. Can you explain to us what your job is, and how that interfaces with SMEs and their credit and lending requests?

Lloyds 1: I am the Senior Manager Commercial at Lloyds Banking Group. I manage a team of 10 relationship managers. My job is to manage that team in everything they do: lending, customer service and risk scores. I have lending discretion, as do the relationship managers. They will speak to customers, who put in a request, and either they will be able to agree it at their level or, if it is above a certain amount, they will come to me. About 90% of the requests that are given to us are sorted either by me or the team. The larger requests go up the line to a credit team.

Barclays 1: Good afternoon. I am a senior business manager for Barclays, and my remit is to look after approximately 75 customers with a turnover up to £5 million. On the lending side specifically, if a customer comes to me for a lending decision, there would be an appointment with me, and I would assess that application and decide whether it would be supported. Depending on the amount, I may have to go to a credit team. I would talk to that credit team, and we would make a joint decision as to whether we would support the application.

Q150 Chair: Have you got a delegated amount below which you can make the decision?

Barclays 1: Yes. There are quite a few criteria that come into the decision, but I can lend up to £2 million.

Q151 Chair: So in the normal course of events, you would be free to make that kind of decision yourself without having to refer it up the chain.

Barclays 1: Yes.

Q152 Chair: [RBS 1] I think that, of the RBS team, you are probably the most appropriate person to start with. Can you tell us what your job is and how you connect with the SME lending world?

RBS 1: Good afternoon, everybody. I [work] for the risk function in the business and commercial banking side of RBS, so I am not on the front line.

Q153 Chair: So you are at a different level in the bank from [Lloyds 1] or [Barclays 1]

RBS 1: I don’t know whether I am at a different level, but I sit within the central risk team that we have for our SME business.

Q154 Chair: Okay.

I want to look at the decisions that you are in charge of. In your relationships with SMEs, would you say that, on the lending front, most of it is driven by their needs and requests, or is it driven by sales targets and other kinds of push targets-if you like-from within the banks? Can we start with you again, [Lloyds 1]?

Lloyds 1: Very much from their requests. We are a relationship bank, and each relationship manager will have a set of customers, typically 150 to 250, and that is their bread and butter-that is all they have. We therefore get to know them quite well and talk to them about their business, and, yes, we will respond to their requests. We would make it known that if they want lending, it is available to them but, no, I would not say that we push lending that they don’t want in their direction.

Q155 Chair: One hundred and fifty to 200 is quite a lot. If you are a relationship manager, can you have a personal relationship with that many businesses? It is quite a big case load.

Lloyds 1: Yes, is the answer. There are some customers who we speak to weekly, and there are other customers within that 200 who we will perhaps speak to on the phone, and their response is, "Look, I know what I’m doing-I’m in business. I’m very happy with your services, and if I want something, I will come to you." The touch is that much lighter. Across the piece we are busy people but, yes, every relationship manager will know every customer.

Q156 Chair: A lot of businesses tell us that they think the personal relationship with banks has been lost, and that they find it difficult to get a human being in the bank who takes the time to understand their business. Do people tell you that?

Lloyds 1: Not in my team, no.

Q157 Chair: [Barclays 1], you said that your case load was 75.

Barclays 1: Approximately 75.

Q158 Chair: So that is about half the size. Why not 150 or 200? Do you find value in having a smaller case load?

Barclays 1: Obviously, from our point of view, although my customers have turnovers of up to £5 million, those do tend to be closer to £5 million than to nought, so they are generally established businesses. The bank’s perception is that their needs may be a little more complex, so I would spend more time with them and develop the relationship. We therefore set a figure of approximately 75 to 80 for each manager, to service the customers’ needs.

Q159 Chair: I will broaden this out a little. In recent years, a lot of SMEs have been unhappy with the service that they have received. Starting again on the left, how do you deal with SME complaints about a lending decision? If somebody goes to [Barclays 1], or one of his equivalents, and they get turned down, what happens in the bank to have another look at that?

Barclays 2: For every decision that is turned down, we first of all communicate verbally with the customer and explain the reasons why. Then we send the customer a letter, again explaining the reasons why we are unable to help them, but we also signpost other forms of finance that may be appropriate. Finally, we make them aware of the independent appeals process that we operate.

The appeals process gets a senior manager in the organisation to look at the proposal with a completely fresh, dispassionate view. In roughly a third of the appeals, we see that we are then able to help the customer. You may wonder why that is, but when you get a fresh pair of eyes, you often get additional information provided by the customer that helps us get to a position where we can help them.

Q160 Chair: So you turn over about a third of the initial refusals?

Barclays 2: Yes.

Q161 Chair: Is that comparable with the other banks?

Lloyds 2: I think that each bank is quite similar, but perhaps with some distinct differences. Within Lloyds, you would find in [Lloyds 1]’s team that each of his relationship managers, when they looked to turn down a customer within their discretion, would go to [Lloyds 1] to have that ratified or, perhaps, reshaped. We also have the independent appeals process for the final decision, and a percentage of decisions are overturned, but I would say that there are two steps in the process for us. [Lloyds 1], with his experience, will either help to reshape a deal, or overturn a decision from a more junior manager before it gets to the appeals process.

Q162 Chair: What does RBS do about complaints?

RBS 2: It is a similar process, in terms of the formalised approach, but I think that the key stage is the interface between the relationship manager and the customer. That is a key stage for us to ensure that we are working closely with the customer to get the right outcome. I can give you an example of how that works: if there is a deal that a relationship manager feels will be difficult to support, because of serviceability or another aspect, they will involve their local director and form a forum of experienced people to throw that transaction around to see if there is an alternative way of supporting it. For us, that is the key phase of making sure that we maximise our lending at that point, rather than waiting for the formalised complaint process.

Q163 Chair: We heard from Barclays that about a third of its initial refusals are turned over. What is the proportion at RBS?

RBS 2: There are two parts to it. Once it goes through the formalised process for formal sanction, we sanction nine out of 10 of the loans that we have got. We find, in terms of the initial stages, that we are probably reversing the decision of the original relationship manager in about 20% of cases. What we have done, over a period of time, is to recognise that the relationship manager is the key point, so we have gone though a very extensive accreditation process for all our relationship managers so that they have a clear understanding of cash flow, serviceability, and what a viable deal looks like.

Q164 Lord McFall of Alcluith: How do you determine the risk appetite, and what level of default will you tolerate?

Lloyds 2: I will answer that. I am a regional director, so I run a network team. I don’t work with those kinds of statistics; we work at the front end of this. What we have, as all banks do, is a credit policy. For us, it is a very sensible credit policy that we have had through the cycle-our credit policy has not changed over the last five or six years, through all that we have been through-and I am sure that the people behind the scenes make sure that the credit policy means that levels of default are acceptable.

For me, [Lloyds 1] and so on, at the front line, we are there to be responsible lenders, and it was the same as when I was at a junior level 25 years ago: you look at the proposition, particularly the areas around whether they have the capability to repay, what vehicle, and so on. Our job is to ensure that, so long as it is consistent with our credit policy, we are then able to work on the proposition with the customer.

Q165 Lord McFall of Alcluith: So that is for higher up, then.

Lloyds 2: It is definitely for higher up. We are not, in any way-well, I am not-running a region.

RBS 1: I was going to add a little to that, because in my role I segue between the front-line people in [RBS 2]’s team and also the central people who would set policy. The way that it works in RBS is that we would first look at the overall likely demand that we expect from our customers over a period of time, going forwards, so we would forecast in terms of what we expect our customers to want from us. We would also look at what our economics department was saying in terms of what the macro-economic and micro-economic environment are in the various sectors that we operate in. We would then look back at our loss experience, through accounts that were transferred into our intensive care section-at what the features of those accounts were that meant that they failed, and therefore at what we might do differently, going forwards, in terms of setting policy.

All of that is then brought together, and once a year would go to our risk committee at a divisional level, which would then set out the risk appetite for the year ahead.

Q166 Lord McFall of Alcluith: So what is the risk appetite in the year ahead?

RBS 1: It is not a simple issue of what our risk appetite is. It varies in terms of-

Q167 Lord McFall of Alcluith: Could you tell me, then, the default level you can tolerate in terms of businesses being out of business?

RBS 1: We do not set in that particular way. What we do say is that there are particular features of deals in particular sectors that we would expect to see. It is not a default rate per se.

RBS 2: Perhaps I could add something to help. In terms of the way we interpret that across the Royal Bank of Scotland--we are green in all the key aspects, so there are no constraints in terms of the current risk appetite that we have in place to stop lending to particular sectors or asset classes across the business.

Q168 Lord McFall of Alcluith: Is Barclays any different?

Barclays 2: I am in a similar position to [Lloyds 2], in that I work with our front-line teams. But in terms of our appetite, we are tasked with growing our loan book, so we want to be writing more debt and our loan book is growing.

Q169 Lord McFall of Alcluith: Do you get feedback on customer satisfaction? What percentage are customer satisfaction levels at? I remember Mr Jenkins of Barclays was before a Committee a few years ago, and he said the customer satisfaction level was 60-odd %. Do you have that from your businesses?

RBS 2: We measure customer satisfaction in a number of ways. We use MORI, as an independent, and in the top end of our commercial book, we sample 50% of our customers over a 12-month period. We look at three or four key areas. One is something called net promoter score, which is how likely people are to recommend us, because that seems to be a very strong indicator of satisfaction. To give you an indication, for [region] that is running at plus 6%. Then we look at individual satisfaction around the relationship manager, and that is running at about 78% or 79%. Then we look at satisfaction with branches and other routes in which customers interface with the group, so we take it incredibly seriously and it is one of the key aspects.

Q170 Lord McFall of Alcluith: Any figures for Lloyds?

Lloyds 2: We all use slightly different measures. We do not use a net promoter score at the moment; we use what is called a care index, which has in it customer understanding, accessibility, reliability and understanding business needs. The score is just under 70 in my region at the moment. It has improved slightly over the past 24 months.

Q171 Lord McFall of Alcluith: And Barclays?

Barclays 2: Our overall score is 92%.

Q172 Lord McFall of Alcluith: Ninety-two-you are top of the league. Okay. Could you send that information, as it would probably be helpful?

As the Chair said at the beginning, there is a contrast with business people we meet on this. What we are trying to do is find out the root causes of the complaints they have. Lloyds sent a submission saying that the three issues are delays in setting up an agreed loan or overdraft, loan and overdraft requests being declined, and issues relating to the overdraft moving process. In RBS, the issues are collection procedures when the bank is seeking repayment of a loan, the application process for credit and, thirdly, withdrawal or reduction of credit facilities. Barclays has two issues over overdrafts and complaints with respect to unsecured lending. Given the complaints we have had, it seems that there is almost a universal view from business that SMEs are not being treated properly. Maybe it is just the people we meet, but it seems as if there are some root causes there. If you think there are root causes to these complaints, what change have banks put in place to try to tackle them?

RBS 2: The key focus is ensuring that the interface between the relationship manager and the customer is as close as possible. We have found that when that relationship works effectively from a trust point of view, many of the issues that you highlighted are less prevalent. There are tangible things that we have done, and I have already mentioned the accreditation piece. The second piece, which is also very important, is to simplify and make more transparent our approach in terms of the way we deal with customers. Through that approach, everyone is much clearer in terms of the deals that are being put together, so that is the key change. We still have some way to go on that. We are making the experience better, but we can make it even better.

Lloyds 2: For us, I suppose there is the process element. Some of those things are down to delays and the perception that we are too slow, so we have had a major process improvement in time to cash for lending, and we have halved the time to cash for a variety of the loans that we are putting on, so that is tackling it tangibly. I think the overriding thing for me is around rebuilding trust-that is what we are absolutely committed to working on with our SMEs. Obviously, over the last few years, there has been a loss of trust in banks. That has therefore meant that SMEs have avoided us when it comes to needing finance at a vital time in their business cycle. We recognise that we have a big job to do to rebuild that trust. You will hear, I am sure, that we all run events where we offer them ideas on access to finance or exporting and so on. Rebuilding that trust will help with some of those issues.

Barclays 2: Ours is a similar theme, but it is about getting closer to the customer and being able to spend more time with the customer. What we have done is to hire more relationship managers and put more people on the front line. That has enabled us to reduce portfolio sizes so that colleagues like Barclays 1 have more time to spend with customers and to understand their businesses and the issues they face.

Q173 Lord McFall of Alcluith: When we went to Birmingham for a day, I was sitting beside a Caribbean patties business owner who said that his bank-it is one of your banks-changed his business credit terms at short notice, which required him to spend many thousands of pounds on advisers to review business plans even though the business had been a customer of the bank for many years. In fact, if I remember rightly, he was talking about 15 to 20 years. Is the short time frame for changing credit terms and requiring owners to pay for advisers to review their business something that happens to SMEs at your bank, and, if it does, do you think it is fair?

Lloyds 2: We brought out something called a customer charter for SMEs-it has been published; it is public-because of fear of that kind of issue. It states that we will not change things like what you have given an example of, unless there is a material change in the risk profile of the SME business. That is one of the ways in which we are trying to rebuild this trust. We give a clear charter, so we can say, "We won’t change your terms; we won’t withdraw your facilities, unless"-of course, we have to be a responsible lender-"there is a change in the risk profile."

Q174 Chair: Is it normal for banks, when a company like the one that John McFall just referred to hits a bit of trouble, to end up charging thousands of pounds for consultancy that is then provided by the bank, as happened in this case? This business got into a bit of trouble and was then expected to pay thousands.

Lloyds 1: I speak for my team, and I have been in the job now for 11 years. I have never, ever charged a customer consultancy fees for changing terms.

Q175 Chair: At Barclays, is that something you do?

Barclays 2: The only scenario I can imagine where we would change terms is if a business had got into financial difficulties. In that scenario, there would have been a breach of the terms and conditions of the facility. Where customers get into difficulty, we introduce our business support team, which is our intensive care team. That team is staffed with experienced and capable managers who are able to help business owners turn around their situation. We generally see a return to health of around 80% of the customers who go into business support; they come back out stronger and healthier.

Q176 Chair: The business pays for that.

Barclays 2: Yes, the business does pay for that because they get specialist support from the bank.

Q177 Chair: They do not have any choice, do they, when they are in trouble? This is a condition of keeping going with the bank-that they pay for its support.

Barclays 2: We are keeping them going so that ultimately, the shareholders will retain some value in that business. If we were not to support them, that business would fail, and not only would their shareholders lose their investment, but our depositors would also lose their money.

Q178 Chair: That is not always how the businesses view this enforced consultancy fee.

Barclays 2: When businesses are in difficulty, it is a very emotive and difficult time for the owners. It is one of the most highly charged conversations that you have as a relationship team with a customer.

Q179 Lord McFall of Alcluith: Lastly, does anyone have any profound insight into why the SME sector feels that they have not been treated fairly?

RBS 2: I don’t think that there is a single silver bullet in terms of that approach. The key thing is building confidence in the market. One of the aspects that would make a difference for all of us is that there is a lot of advice and support available from lots of disparate parts of the industry. Bringing that together and harnessing that power would make it easier for SMEs to access that, without having to go to lots of different sources. It would be a mechanism of ensuring that we are all pulling in the same direction to achieve the same objective, which is ultimately to support the SME sector. That is because we know it not only underpins the success of the customer, but also UK plc as well. That is our key objective.

Q180 Mark Garnier: [Barclays 1], may I turn to you? I think you have 75 customers who have turnovers of up to £5 million.. When you speak to your customers, do you get any sense that they really understand how a bank works? Do you find it quite difficult sometimes to be able to communicate with them because there is a lack of understanding on their part about what you do?

Barclays 1: No. At the moment, I spend a lot of time with my customers. Over the years we have been talking to them about the changes in the economy, and that involves some of the bank’s profile and risk. Often, when a conversation starts with, "How’s the economy going? How are your other customers performing?", they are trying to get a feel for what is happening in the market place. So over the years it has been a period of education; at the moment, the customers whom I deal with are well-versed in the economy and what is happening.

Q181 Mark Garnier: I am thinking more about how a bank itself works. Obviously, we can all have a different view of the economy and many of us do, but in many cases, my constituents will come to see me to raise a complaint. They will say that it is outrageous that the banks are not lending money. When I sit down and talk to them for a little bit, I discover anecdotal stories-like those you may have heard-where perhaps a business is outraged because the bank asked to see its report and accounts. I can see a lot of people nodding around the table. What I really want to find out is, to what extent among you do you find that if the customer knew more about what you were doing, your relationship might be better?

RBS 1: I have a point on that which might shed some light. When we revised our lending processes and systems over the last two years-we have done a lot of work on those-one of the key things we had at the forefront of our minds was what the impact was going to be on the customer. What are our relationship managers telling us about the conversation that they had with customers, and where are the points of difficulty in that? One of the things we found was that you might get a case of Chinese whispers about what the credit department needed to make a decision. Part of that might go missing in terms of what the relationship manager might then talk to the customer about. What then came back was not everything that the credit department needed to make a decision, so one of the things that we have worked very hard at doing is being very clear and much more structured about what the relationship manager needs to talk to the customer about. The customer then knows exactly what is required by them to give to the bank to make a decision. Equally, at the other end of the cycle, if things do not go according to what the customer might have wished and the decision is a decline, we also make sure that the communication going back the other way is now much more clear from the credit department to the relationship manager, so that they can convey that on to the customer. We were critically aware of that communication loop with the customer.

Lloyds 2: I think it is a particularly interesting question, because what this could identify is that there is a distinct difference between an SME who turns over £5 million, £10 million or £15 million against the SME who turns over £200,000, £300,000 or £400,000.

Q182 Mark Garnier: Which we referred to as micro-businesses.

Lloyds 2: Exactly. At £5 million, £10 million or £15 million, you are going to have a finance director, and that finance director is going to have knowledge of how banks work. That is why they are there. So the process works in a way that it should. Obviously, therefore, the challenge for us collectively is how we actually help our SMEs in the lower turnover brackets. They went into business not to write the world’s best business plan and not to create their own report and accounts; they went into business because they could make or sell something. That is the element where we have a lot of work to do collectively with those clients.

Lloyds 1: Despite being the financial capital of the world, we have an awful lot of customers who run small businesses of £200,000 or £300,000 and they are the HR manager, the sales manager, and the accounts manager, and we do need to spend a good amount of time explaining their balance sheet to them.

Q183 Mark Garnier: And how you work.

Can I change the subject to something else? I am looking at the RBS chaps at the far end. A constituent of mine showed me an e-mail that they received from Lombard, which I think is one of your subsidiaries, and it was quite interesting. It says: "Dear Mr Bloggs, we are sorry that we cannot lend the £25,000 you need against your £150,000 printing machine. Unfortunately, that silo of money has run out. However, you will be delighted to hear that if you want to buy a car that is no older than nine years old, we will be able to lend you £25,000 against that." Can you explain how that works?

RBS 2: Obviously, I do not know the specific case that you are referring to and I would be very happy to look at that, so that we can investigate it in more detail. The key piece is ensuring that our relationship managers adopt the standards that we expect. On the face of it, from what you have described, it does not sound like we have met the requirements that we would set for ourselves. There are no pots of money for certain types of things. We have a lending appetite. We are open for business and we want to lend to viable businesses. The key issue is ensuring that we are lending to viable businesses appropriately. I am very happy to pick up that specific case.

Q184 Mark Garnier: So, to be absolutely clear, what you are not doing is managing your risk profile of the organisation on the basis of the type of lending. You are doing it on the basis of borrower classification.

RBS 2: Absolutely. There is one openly published exception to that, which is our exposure to real estate, where we built up a very large position over 20 years. Working closely with the Financial Services Authority as part of the prudential review, we are actually reducing our overall exposure to commercial real estate. For all other asset classes and assets, however, we have no restriction in terms of our lending appetite, and we are actually keen and want to lend more.

Q185 Mark Garnier: I am drilling you just to be absolutely crystal clear on this. You will not allocate money between, say, classes like asset financing, invoice financing or property financing. All of it is one central lending book.

RBS 1: We apply control limits by sector and by asset class. That is part of setting the overall shape of the balance sheet of the business that we want to be. The only one of those that has been at its limit, as [RBS 2] said, has been the property one, which we are actively looking to manage down. The other control limits that we have are part of our setting of risk appetite for the business. We have capacity under all of those and if we get within a margin of the limit we have set, we simply look at that again and say, "What are the risks attached to that? How does it look against the wider balance sheet?" We will then make a decision about increasing that limit or leaving it at a particular level. The important thing in relation to your question is that that macro way of managing the balance sheet of the business is not communicated down to our front-line relationship managers. So, they would have no sight about the way the overall balance sheet is managed. They are targeted to interact with customers on a purely transactional basis: if it was a good deal, we will do that deal with the customers.

RBS 2: That is important to ensure that there is continuity in the front line and not a stop-start, stop-start type of approach, so that we run through each of those asset classes and support viable businesses on that basis.

Q186 Mark Garnier: Do any of you have anything to add to that? No, so let us turn to incentives. Right on the front line when you are a relationship manager-how do you incentivise your relationship managers to perform well? What are you looking at in terms of performance?

Lloyds 2: Obviously, when you talk about incentives you talk about the whole job remuneration. So the first thing is base pay. You want to match base pay to the experience and skills that that individual brings to the business. That is the key foundation because this is not an investment bank. I am running a great team of people who have just been retail commercial bankers for years. So base pay is the absolute keystone. Yes, there is variable pay. Again, let me re-emphasise: this is not investment banking. So the variable pay is something that we look at on an annual basis. But it is awarded on our view across the entire balance scorecard, as we call it. So the balance scorecard will have elements like how that relationship manager’s business has grown in deposits and lending. We are obviously keen to see both sides of the balance sheet grow. Equally weighted, for want of a better word, is how they performed in risk metrics, in their customer service achievements because they have the indices that we talked about earlier, how their team behaviours have been and so on. Therefore, an annual assessment is made on a balance scorecard basis and that will be how variable pay is also awarded on top.

Barclays 2: Like [Barclays 1], we operate a bonus scheme for our relationship managers, which typically would pay out around 10% to 12% of their base pay. We talk about looking at our business through the lens of the four C’s. So we base our assessment of a manager’s performance through the year against the four C’s. So it starts with colleagues. How are our managers working together? Are they working internally to get the best results for our customers? Then we look at the second C, which is customers. What are our advocacy scores like? What is customer satisfaction looking like? Then we look at citizenship. What are our people doing in the communities in which they operate? Are they becoming a figurehead for the organisation? Are they representing us as they should in the community? Finally we look at the company measures: are we growing our customer base? Are we growing our debt book? Are we growing our deposit book? Are we in control of the business from a compliance perspective?

Q187 Mark Garnier: You will be well aware of the interest rate swap discussions that are going on at the moment. I am clearly aware that this is on an ongoing basis. This probably refers back to pre-crash so I suspect that we are probably not seeing any of those interest rate swaps or questionable ones being sought at the moment. It raises an important debating point about how staff are incentivised. Certainly one of the things that has come up in previous panels like this where we have spoken to an expert is that without a shadow of a doubt when you get to a situation in a bank where your margins on lending are next to nothing because the competition is so great, which is why it refers back to pre-crisis, there is then an incentive given to relationship managers to try to develop what is a simple loan into something that could be a profitable opportunity for the bank. In the case of the interest rate swaps, or interest rate derivative products, it seems this was one of the biggest incentives that were available. It is difficult to ask a question, because I don’t necessarily want each of you to speak specifically about any case because, of course, this is all subject to investigation, but I am quite interested in your impression of the bonus culture that you have in certain banks. To go back RBS, I would like to know your thoughts about the bonus culture when you end up with these perverse incentives.

RBS 2: Yes, and I think that you make a very good point that the mis-selling swap issue is a pre-2008 serious issue that we are working on closely with the FSA. It is important to put it into context in terms of the incentivisation process that we have. In terms of RBS looking after the SME sector, the average bonus payment for over and above performance was £4,900 in 2011. Over 23% of the relationship managers did not get any reward at all, because we look through those four lenses, which is customer, risk and professional standards of behaviour. It is only if we pass through those three gateways that the financial benefit to the shareholders ultimately gets measured as part as that process. There is a clear distinction, I think, post-2008, where those bonuses, or payments, are made on a discretionary basis against each of those components, rather than the practice in the past, when they have been linked more directly to financial outputs. Therefore, the incentivisation to sell products that are not relevant has been delinked by that delinkage of approach.

Q188 Mark Garnier: Okay. Does anyone want to add to that?

Barclays 1: Yes. From Barclays’ point of view, Barclays Business does not sell interest rate swaps. It is not a thing I can comment on with regard to incentives, but I have never received an incentive for selling any particular product. It is a discretionary bonus pot, as [Barclays 2] explained earlier.

Q189 Chair: Barclays made an announcement recently to say that it was going to get rid of sales commission for front-line staff. I am slightly confused. That statement was made by the bank as though that were a change in policy, and that commission and bonuses would now be based on customer care, rather than sales volumes.

Barclays 2: That’s right, yes.

Q190 Chair: But from what we have been hearing, and the way that you talk about bonuses that are paid at the moment, they are not based on sales volumes, so I am confused as to whether this is a change in policy or not.

Barclays 2: It is a change in policy for colleagues who were on incentives programmes, so there is difference between an incentive programme and an annual bonus scheme. My managers, such as [Barclays 1], work on an annual bonus scheme. Colleagues who are based in our branch network were on an incentive scheme.

Q191 Chair: What kind of products would they have been selling that they were previously getting bonuses, incentives or sales commission for?

Barclays 2: I don’t work in that part of the business, so I can’t really comment.

Q192 Chair: Is there a debate in the other banks about getting rid of sales commission, to try to change the culture?

RBS 2: Sales commission as such does not exist in the part of the business that we look after. In reality, the relationship manager will fulfil a need for a client, and that might require a particular service. There aren’t individual volume product targets, because what we want to look at is making sure that the trust is rebuilt with the SME and we move to a scenario where the bank manager becomes a trusted source of independent information to help that business grow, or to manage their risk, or to become efficient.

RBS 1: Just to add to that, in all of our businesses in this part of the market we have moved away from a direct link between sales and incentives, and towards a discretionary scheme. It is much more judgment-based, using a range of factors, including risk management, in terms of how we reward our people

Lloyds 2: Obviously, representing commercial from Lloyds, so the SME, it is not a volume sales business, as you heard. For the purpose of variable pay, it is all based on the balanced scorecard. I don’t know about all the elements of the rest of Lloyds, but I certainly know that within the retail business it is based on the balanced scorecard approach.

Q193 John Thurso: Can I just get some facts straight? First, what is the structure from the bottom to the top? I will start with RBS. Who is the lowest interface and what levels are there before you arrive at Chris Sullivan?

RBS 2: The key role is the interface between the client and the relationship manager.

Q194 John Thurso: And the title of that is just "relationship manager".

RBS 2: Yes, we have two grades of relationship manager looking after the top range, so we have a relationship director who would have up to, say, 35 relationships for the complicated connections that total up to £25 million. Then we have a senior relationship manager, who looks after the slightly less complicated ones.

Q195 John Thurso: I am sorry-this is slightly counterintuitive. You have a relationship manager who looks after the complicated ones and a senior relationship manager-

RBS 2: It is the relationship director who looks after the more complicated ones.

Q196 John Thurso: So a senior relationship manager is actually junior to a relationship director.

RBS 2: That is correct.

Q197 John Thurso: So at the bottom of the pile is the senior relationship manager-

RBS 2: Well, in the top part of the commercial that is correct. The second level would look after something in the region of 60 relationships-slightly less complicated than the top ones-and as we move through the sizing, we move to relationship manager, who would have something in the region of 120 clients of a smaller nature. Then we move into what is called the business manager, who would have a higher number of relationships because the clients are at the very small end and have less sophisticated and time-demanding needs.

Q198 John Thurso: I am sorry; I am going to be very pedantic here. I think half the time, none of us really understands what a senior and a junior and a director actually mean. So if I were to take an office somewhere like Aberdeen or Inverness or somewhere like that, there are going to be various types of managers. There is going to be a senior relationship manager in there, probably one or two, and there are going to be some ordinary relationship managers and there might be a relationship director.

RBS 2: That is correct.

Q199 John Thurso: And they are all doing roughly the same thing, but for more complicated cases or with different degrees of risk of the firm and the responsibility for that firm.

RBS 2: That is accurate, because we have a certain number of customers that we look after at the moment and we have a certain number of customers that we would like attract to the RBS group.

Q200 John Thurso: And some you would like to get rid of.

RBS 2: We work hard with customers to return them back to stand-alone strength. I can tell you more about that if you want to. Fundamentally, we structure on the basis to meet the needs of our existing client base and the customers we would like to attract.

Q201 John Thurso: So we have these people who interface with the clients, at slightly different levels but all roughly-

RBS 2: Indeed.

Q202 John Thurso: And they are all run in that office by-

RBS 2: By a director, and that director will have approximately eight or nine direct reports and they lead that team in that local market. They are the key interface with local professionals, ensuring that our team is operating effectively to support our clients in that particular market.

Q203 John Thurso: And that director who runs that office reports to-

RBS 2: A regional director.

Q204 John Thurso: A regional director. So that is probably somebody in Edinburgh, for example.

RBS 2: Well, regional directors are based in their local patch. So if you take the of example of [a] regional director who looks after Kent, that part of the business is based in Maidstone, right in the middle of the patch. Each regional director will probably have about six or seven directors who report to them. So we try to keep the command and control framework tight so that my regional directors are active in the market with their customers for those larger transactions.

Q205 John Thurso: So then you have the regional director, and above the regional director you have-

RBS 2: You have someone like myself.

Q206 John Thurso: So as a managing director, you would be receiving the reports of regional directors and the actual office would be two levels below you.

RBS 2: That is correct. I spend a great deal of my time working closely with regional directors and relationship managers and with customers. [Interruption.]

John Thurso: That’s Pavlov going off in the background.

Chair: At this moment we have to take a 15-minute break.

Sitting suspended for a Division in the House.

On resuming-

Q207 John Thurso: We have got to you, [RBS 2], as a managing director with regional directors. And then above you?

RBS 2: There are six managing directors, and they report to a head of commercial banking who reports to a gentleman who runs the whole of the SME market, including Lombard and Invoice Finance, and the support teams as well. He reports to Chris Sullivan.

Q208 John Thurso: Okay, I think I’ve got that. I just want to understand the decision tree, as it were. What is the similar thing at Lloyds?

Lloyds 2: There are relationship managers at various grades, so [Lloyds 1] has 10 relationship managers, for example, and then there is senior manager, [Lloyds 1],.

Q209 John Thurso: So you as a senior manager are running an office.

Lloyds 2: Two or three.

Lloyds 1: Two or three different offices.

Q210 John Thurso: You as a senior manager are more important-if I can put it like that-or you are more senior than a senior relationship manager in RBS.

Lloyds 1: I like to think so, yes. I don’t see customers; I manage a team of relationship managers who look after customers. So I don’t have customer contact, directly.

Lloyds 2: So the relationship manager is a senior manager who looks after approximately eight to 10 of those managers, then there is an area director looking after a team of senior managers. An area might be the Thames Valley or East Anglia. Then you will have a regional director. [who, for example,] have seven of those area directors. Then you have the network director, with four regional directors like me reporting to a network director. Then they report in to the managing director for commercial, who reports in to the wholesale group executive director, who reports in to Antonio Horta-Osorio.

Q211 John Thurso: Okay, and Barclays?

Barclays 2: [Barclays 1] looks after customers. He reports to a regional business director. She reports to me. I report to our customer and commercial director for the UK. He reports to the gentleman who runs all the customer-facing staff in the UK retail bank. He reports to our UK chief exec, who reports to Antony Jenkins. So from [Barclays 1] to Antony Jenkins there are seven levels.

Q212 John Thurso: The next question-I will start at that end and go the other way, just for fun-is: who takes what level of decision at each of those levels? I recognise that when it comes to lending to the client it is not a function of how high up you are in the chain. Some of you have mentioned having discretions at certain levels. Typically, what is the discretion at each level, before it goes off to a risk committee or whatever?

Barclays 2: [Barclays 1] as a relationship manager can lend up to £2 million, depending on the complexity and security of the particular deal. Managers have different levels of authority, depending on their experience and skill base, but [Barclays 1] would be one of our more experienced managers in the SME space.

Q213 John Thurso: And if it is more than £2 million?

Barclays 2: It goes into the credit team and it is looked at jointly by [Barclays 1] and that team.

Q214 John Thurso: How many credit teams would there be in the UK?

Barclays 2: Seven.

Q215 John Thurso: So they are broadly regional.

Barclays 2: They are, yes.

Q216 John Thurso: And then, presumably, if it went to a level beyond the regional credit team, you would be out of SME lending and into full-on corporate.

Barclays 2: You are, you’re into corporate, but we have regional credit teams for corporate as well.

Q217 John Thurso: Lloyds?

Lloyds 2: All relationship managers have a lending discretion unless they are new to role, of course.

Q218 John Thurso: They all have lending discretion?

Lloyds 2: Yes.

Q219 John Thurso: Up to a limit?

Lloyds 2: Variable on their experience and which courses and accreditations they have got through. So up to level of half a million pounds although you can have a double discretion upon renewal so it could be a million and so on. [Lloyds 1] has a lending discretion of half a million is it?

Lloyds 1 indicated assent.

Lloyds 2: Half a million pounds looking after his particular part of the business. Beyond that it then goes into our credit team for anything that is required above those levels.

Q220 John Thurso: And presumably, equally, if it goes beyond that you are into corporate and out of SME?

Lloyds 2: Yes.

Q221 John Thurso: And RBS?

RBS 2: In terms of approach, 95% of the applications the relationship managers make can be agreed automatically. They don’t have a formal lending discretion themselves but they gather relevant information and provide that.

Q222 John Thurso: Just to be absolutely clear because this is quite an important difference, back in the days when there was a manager with discretion in the Thurso branch of RBS I was told by one who had retired that he had up to £500,000 of discretion. He just took that decision. That has gone now, has it? The guy in the Inverness office cannot now say, "I’ll lend you half a million quid," or £100,000 or whatever, but has to go further up the chain?

RBS 2: That is correct.

Q223 John Thurso: So the individual office has no discretion. Everything is going to go-

RBS 2: I can give you a couple of examples to help you with that. In our commercial market relationship managers can agree up to £100,000 through an auto-decisioning approach. So many of the decisions are made without any further intervention based on the interface between the customer and providing the background information. For our more complicated relationships, because we lend up to £25 million in the SME market, we would work with the client, gather the relevant information, submit that to a credit office and then there would be a discussion around the deal that has been submitted. As an example, for the largest types of transactions-the business, i.e. myself-I sit on one of the lending committees to make those joint agreements in terms of the largest lending in the SME market. So we have very much an integrated approach between the credit teams and the business. That has been a key change.

Q224 John Thurso: Obviously in my part of the world there is what used to be HBOS, which most of still think of as the Bank of Scotland, there is RBS and then Clydesdale trot along. Those three do virtually all the banking. So most of the stories that come to me are about one of those three. One of the ones that you hear quite often is, "Oh the relationship manager was fully in support but when he went off to wherever"-Edinburgh, I suppose-"it was turned down." Is there a problem there in the translation of the decision by the credit committee you are sitting on? Is the manager not transmitting the stories the client thinks he has given so the credit committee is not seeing it? Or is it the other way around. The credit committee sees everything, makes a rational decision, but the manager does not want to tell his client the bad news completely ungilded?

RBS 2: If I am being open about it, there could be both situations. We are working very hard to ensure that we increase the consistency of our decisions to support our clients. So the key issue to look at in terms of the way that that operates is to ensure that the relationship managers are appropriately skilled and accredited, and gather the relevant information to assess what is a viable proposition from a client point of view. Therefore the situations where that arises diminish dramatically. Let me a give a fact to help with that. In 2009 we declined about 11.1% of the applications that went through that process. That is now down to 8.8% in the first half.

Q225 John Thurso: What is the definition of "declined"? Does it require a formal application for it to be declined?

RBS 2: Yes, it does. That’s right.

Q226 John Thurso: So, if you have a discussion with your relationship manager, who says, "Not a prayer", or words to that effect, there is no application.

RBS 2: That wouldn’t happen. Basically, what we do is when a customer makes a lending request, the relationship manager will assess that. If they’re not sure that there is a deal to be done there, through whatever the issue is, they refer to their director-as we have referred to before-who in their local market is a seasoned professional. Many of them have 25 or 30 years’ experience of lending on the high street, and they provide the direct support to ensure that a proposition can be shaped to meet the client’s needs and also the group’s needs.

Q227 John Thurso: Let me go back, because the third strand I want to ask about is, who decides the cost of credit in Barclays?

Barclays 2: We have a pricing team.

Q228 John Thurso: So, [Barclays 1], you have a client and they’re a good, solid manufacturing company with a reasonable balance sheet, etc. They want to borrow £500,000 or £1 million to expand. It is covered several times, it looks good and all the rest of it. So, they’re a good client, in other words. Do you have to just take the price that’s given, or do you have some ability to discuss the pricing with the client?

Barclays 1: We do get an indication of the price that we should be lending at, with the rates and fees, but we do have discretion ourselves as well to lower the indications if we particularly want to do a deal for a customer and he’s not happy with the indication rate.

Q229 John Thurso: Okay. What about in Lloyds? How does the pricing operate on credit?

Lloyds 2: We have a matrix approach, so it is based on the risk and so on. But we also have the flexibility whereby an area director or regional director can actually sign off lower prices based upon the recommendation of the relationship manager.

Q230 John Thurso: Okay. And RBS?

RBS 2: It is a very similar approach. In reality, we have a pricing calculator, which assesses the risk of each proposition and prices on that basis. Relationship managers have discretion and so does the team above them, but ultimately I have discretion to change pricing, providing it is above the cost of capital.

Q231 John Thurso: What is your cost of capital at the moment?

RBS 2: The cost of capital is running at about 12%.

Q232 John Thurso: So, you’re saying that a loan you would make would be above 12%?

RBS 2: No, because you don’t have to cover everything on a pound-for-pound basis, so obviously the wholesale cost of funds would have increased-

Q233 John Thurso: So the cost of capital is only part of the equation?

RBS 2: It is only part of the calculation. That is why we’re using an asset pricing calculator, because we want to try to simplify that process for the relationship managers and ultimately for the customers.

Q234 John Thurso: How much of your capital is actually in the pricing? You have got two things: you’ve got your cost of capital; and then you’ve got your cost of funding.

RBS 2: There is a range of things that are included, so, cost of capital, cost of liquidity and cost of impairments. There is a whole range of aspects that look into it. I think the key thing for us is that we want to make sure that price isn’t a barrier for borrowing. So, as an example, with the funding for lending scheme that has been put out, we have got a £2.5 billion portion of that. We have already lent £1 billion. And for the smaller customers, it ranges between £25,000 of loan and £250,000. The average saving is 1.6%. So what we are trying to do is to remove that as a barrier and to build confidence in the market.

Q235 John Thurso: Roughly speaking-I know this is very roughly speaking-on average, what would a reasonable small or medium-sized enterprise expect to pay for loan finance at the present moment in your organisation?

RBS 2: If we focus purely on what I call non-property-so, non-commercial-real estate, which we have already talked about as an area we are looking to reduce, the margin depends on the risk, on the type of client that we have got. So, in the market that I am responsible for, which is the top end of the SME market, a customer may pay 3% margin over base. It could be lower. It depends on the risk profile.

Q236 Chair: What is "base"? When you talk about "base", do you mean the Bank of England base rate?

RBS 2: Yes, the Bank of England base rate. That’s right.

Q237 John Thurso: So you would look at 3% or 4% as being a very average rate. Go back six years and it was sort of 2%, and risk was not priced enough. So now we are looking at 3% to 4% as about the appropriate price of risk for a decent piece of business.

RBS 2: At the top end of the SME book, that is correct.

Q238 John Thurso: So, for example, if you were up to 8% or 9% over base, you would think that that must have quite a lot of risk in it.

RBS 2: Based on the top end of the commercial book, that would be reflective of the risk. Those are not rates I see on a regular basis at all in the part of the business that I am responsible for.

Q239 John Thurso: Likewise, for each of the others, roughly what is your average cost to a business?

Lloyds 2: It is such a variable question. We certainly do price below 3% over base rate. We very much like the funding for lending scheme, because it is an excellent additional support to our SMEs. Obviously, for those with a higher risk profile, however, you have alluded to rates way higher than 3% or 4%.

Q240 John Thurso: If you go to a micro-business, they are very happy to get it at 12%. For a reasonably well-founded business that has reasonable net assets, sensible gearing, a reasonable interest cover multiple and all the rest of it-

Lloyds 2: 3% to 4% is very much there. We can also look at where the funding for lending scheme comes in, so you can take 100 basis points off some of those rates.

Q241 John Thurso: Barclays?

Barclays 2: It is in the same range. I think the average margin on my loan book is about 3.5%. We have taken a different approach with the national loan guarantee scheme and the funding for lending scheme. Rather than discount the margin, we have provided that discount by way of cashback up front to the customer, so that they are given a lump sum to reinvest in their business.

Q242 John Thurso: This is my final question, as I know that we have run out of time. One of the things that repeatedly comes to us from anybody you speak to in the banking world, from the top right down, is, "We’re trying to lend, and the pricing is quite reasonable. If you could find us the business, we’ll happily lend to them." At the other end, I did a survey recently in my part of the world, and because I know a lot of the businesses I got a lot of them to fill it in. I was staggered by how many of them had had their pricing changed, or had been put into intensive care units or whatever. It was much more than I would have expected. I think they were all being quite honest. There appears to be a complete disconnect between what the customer on the ground thinks is happening and what the bankers think they are doing. Is there anything that any of you can say to help us understand that and to try to join it up, which is what the public want us to do? If you have an idea, we would sure love to know what it is. Is there anything at all that you could say to help with the question of why you are all out there doing a good job, and our clients-our constituents-seem to be not feeling it?

Barclays 2: We are in the business of lending to viable businesses. We are well capitalised and have money to lend. One of the biggest challenges that we face is finding the right businesses to lend to. You do hear things in the market and from professionals about the view that banks are not lending. Where I think that disconnect comes in is with the difference in expectations. We are a debt provider. We provide debt to our customers. I think there is an expectation that banks will provide equity. A viable business does not need equity. You can fund it with debt, because you have a demonstrable cash flow that will service the repayments. The disconnect is in the equity market. I would be in favour of looking at schemes to provide equity to the SME market, rather than debt. Once a business has taken the equity and developed itself, it is then hopefully able to demonstrate sufficient cash generation to take debt from banks.

Q243 John Thurso: Any of the others?

Lloyds 2: I think there is a lot to be said for that. We have good contacts with, say, [City] Business Angels, who try to help with that, but there are not as many around now as there used to be, particularly at the SME end of the market. I do not think it is seen as very profitable. We are a lending bank. We do not lend on equity. We are conservative bankers.

Your particular point from constituents on pricing concerns me. I think that we definitely need, first, to ensure that we are very transparent in what we do-I talked about our customer charter, which says that we will not increase the price, unless your risk profile worsens markedly-and, secondly, to work closer with yourselves, on where this kind of dissatisfaction lies because it does not help anyone. We are trying to rebuild trust and give our SMEs confidence, and if that is genuinely the feedback that we are getting, it does not help us because we are trying to grow our business by helping SMEs.

Lloyds 1: We are still speaking to customers on a daily basis and saying, "If you would like to borrow some money from us, it is available to you." There are a number of customers who are still expressing surprise that that is there.

Q244 John Thurso: Is there a slight problem, in that the ones you want to lend to do not want the money, but you do not want to lend to the ones that do want the money?

Lloyds 1: That has always been a problem for banking. Within that, there are an awful lot of customers who would borrow and we would lend to. Undoubtedly, there are also customers who want to borrow but we would not lend to, but there are people we speak to daily, particularly at the smaller end of the market, who believe too much of the press. I am not saying that all the press is wrong, but those customers have read and now believe that the banks do not want to lend.

John Thurso: I know what you are saying, because everyone knows someone whose granny’s friend could not get any money. Actually taking an example of someone who will give you their books and say, "Here’s the correspondence," is hard to find.

Q245 Mr Love: May I follow that up? I was struck by all the efforts that you put in to measure satisfaction. You all had a satisfaction register, but you do not seem to be making-if I may put it this way, and it is not intended as an accusation, merely as a reflection-a great deal of effort to discover what is at the heart of this dissatisfaction shown by all the submissions we have had from the small business organisations. They all say the same thing. I have no doubt that we would all reflect, "Well, they would say that, wouldn’t they?" But I am struck that you do not pay as much attention to those who are dissatisfied-who may well be a minority, even a small minority-as you do to those who are satisfied. Is there any effort even to measure, or at least make a summation of, the reasons for the dissatisfaction?

Let us start with [Barclays 1]. I was just about to say that I have taken the sun off your eyes. There have been gargantuan efforts around this room this afternoon to make you feel at home, and I do not want to make you feel as if you are under some sort of specific pressure, because the sun is still shining on you.

[Barclays 2], what efforts do you make to understand where all this dissatisfaction is coming from?

Barclays 2: I talked earlier about putting more managers on the high streets so that we can spend more time with our customers in smaller portfolios, but some of the other things we have been doing are various clinics. Over the past 12 months, we have run some 800 clinics around the country, and these are on different topics. We have lending clinics at the moment. Linking with the point that Mr Garnier made about micro-businesses not understanding what banks are looking for when they come forward for lending, we run lending clinics in our branches. We advertise those. We work with the FSB to encourage their members to join the Forum of Private Business. We are doing some at the moment to educate people on exporting and the support that the bank can provide where they are looking to open up new markets. These are things that we are doing. We struggle to get people to attend. We work with partner organisations and firms of accountants and lawyers, but we really struggle to get people along to them.

Lloyds 2: We also run a lot of events, and so on, to try to build on that. Do we take complaints seriously? By golly, yes. If we ignore them, we will have a business that goes bust, because our customers would leave us, which does not help in any way. If I can give you one simple example of how we tried to tackle this earlier in the year, we get verbatim comments from all of those index things that you mentioned. Customers will actually say, "Look, I’m dissatisfied because of this, that and the other." For several months, all of our area directors, myself, the regional directors, the function directors and the managing director telephoned several of those complaining customers from around the UK. We fed all that in, and we found the most consistent top-10 complaint issues. That had a great effect on the clients when we phoned and explained who we were and why we wanted to find out more. But the point of this was to try to solve some of these. I mentioned earlier time to cash in a lending situation, where we were told that we are too slow. That came through in some of the calls that we were making to potentially dissatisfied clients. That is one example of where we do take it very seriously. Why wouldn’t we? It is in our interest to grow our business by satisfying and delighting our customers.

Q246 Mr Love: Let me press further. I will turn to RBS to respond to this. One of the things that I have been most struck by has not been what we have been talking about so far, which is new applications or an existing business applying for additional credit, but long-term customers of yours who suddenly, out of the blue, like the patties business that we talked to in the West Midlands, have their credit terms and conditions changed unilaterally. They have explained to us that they do not see any additional risk factors that would lead to that change. How do you explain that? Where is the problem in long-term existing businesses where this is happening? Are they right to be dissatisfied at the way you offer a service?

RBS 2: I think that, in reality, dissatisfaction, while it is disappointing, is an important mechanism for us to continue the change programme. I am very fortunate. I am in a very privileged position. I see a lot of applications, a lot of lending, and a lot of customers who are happy with the way that we have treated them. I know that many of you do not see that. It is more about the issues that we need to deal with. There are a number of components that we go with. It is easy to say we take things seriously, but for me it is about how, through the organisation, we connect with customers who are dissatisfied.

One of the things that I do personally, just to give you an indication, is that every three weeks I invite 15 people in to have dinner to talk about why they are dissatisfied with the group. It is a pretty lively event, but it gives me direct contact with those people you have described who are dissatisfied, and it enables us to start to change our proposition to meet the needs that they have articulated. The key one for us is making things simple, and that is a key requirement both in business and in life.

Q247 Mr Love: Let me ask a second from last question in relation to the customer’s risk profile. Lloyds has it in their customer charter that unless there is a market change-and you mentioned markedly-in the risk profile, you will continue to fund at the level that you have. I would assume that is the same for all of you. Would you put your hand on your heart and say that that is the only reason why you would change a customer’s credit, or are there are other reasons? We continually hear about the difficulties that banks are in.

Lloyds 2: There is a simple answer: absolutely yes. That is the only reason.

Q248 Mr Love: Do the others agree with that?

RBS 2: Yes.

Barclays 2: Yes.

Barclays 1: Yes.

Q249 Mr Love: Let me ask one final question. I shall come to [Barclays 1]. I was leaving you out to let you bask in not having the sun shining in your eyes. You are allowed up to £2 million in some circumstances. If you had a lot of very good applications, do you reach a limit before the end of the year?

Barclays 1: No.

Q250 Mr Love: So you could potentially lend all the money that is available in your branch or in your region.

RBS 2: There is not a set target of money available in each branch. We are all encouraged to grow our individual lending books. So yes, the sky is the limit as far as I am concerned.

Q251 Mr Love: [Lloyds 1], you have 25 relationship managers?

Lloyds 1: No, 10.

Q252 Mr Love: I do apologise. Do they reach a limit?

Lloyds 1: No. There is no limit at all.

Q253 Mr Love: RBS 2, are there any limits placed upon them?

RBS 2: There is no limit at all. The key thing is the continuity in the marketplace, to know that we are open for business. We want to lend and we want to lend more, so we do not put caps in place at all.

RBS 1: Can I reinforce that? In the credit teams that I look after, there is absolutely no limit on the credit teams either. There is no limit on the relationship managers, no limit on the credit teams. They can simply look at it deal by deal and lend up to a certain amount that we allow them to lend up to, but in terms of the overall pot, if you like, there is absolutely no limit. We are totally open to all approaches.

Chair: Mark, do you want to come in at the end here?

Q254 Mark Garnier: Just one quick one following on from John Thurso’s question about the cost of loans. We obviously appreciate that loans carry with them an interest charge, but what about set-up fees and administrative charges? [Barclays 1], if you are lending money-£500,000, say-to a local business, how much would they have to pay in set-up fees and in management fees on an ongoing basis throughout the life of the loan?

Barclays 1: Each customer is different and, as we said earlier, it depends on the risk profile of that customer. Our pricing desk looks at a mixture of the percentage above the base rate and the lending fee for the product. On average, you would be looking at somewhere in the region of 1% to 1.5%.

Q255 Mark Garnier: So it is a percentage charge of the value of the loan.

Barclays 1: Yes.

Q256 Mark Garnier: And is that a set-up fee or an ongoing management fee?

Barclays 1: If it is a loan, it is a one-off fee.

Q257 Mark Garnier: A one-off fee. So there is no management fee.

Barclays 1: No.

Q258 Mark Garnier: Is that the same for the other banks?

RBS 2: Yes. Under the funding for lending scheme, where we have taken the step-

Q259 Mark Garnier: Let us take a step back from funding for lending-just normal lending.

RBS 2: There is an arrangement fee for setting up the facility and no other fees.

Q260 Mark Garnier: And no other fees-definitely no other fees. Okay.

When you are establishing a loan, presumably it does not matter how big the loan is, the amount of administrative cost that goes into it is the same, isn’t it? It is the same amount of man hours, time and paperwork-whether it has £5 million at the end of it or £50,000, it is the same amount of work pretty much.

Barclays 2: Sorry, that depends. If [Barclays 1] signs something off under his own authority, then that would not need the input of the credit team, but more complicated deals involve more colleagues looking at and assessing the risk.

Q261 Mark Garnier: But a complicated small deal, a complicated £50,000 loan, is not viable commercially for a bank to do too many of, is it, ultimately? If you spent all your days lending out blocks of £50,000, you would spend all your time doing not very much-not getting up that side of your balance sheet.

Lloyds 1: Can I just answer that? I spend all of my time with half of my relationship managers getting them to lend up to-£50,000 would actually be quite a sizeable loan. What we call medium turn-over managers are looking after businesses of £150,000 or £200,000 up to, say, £500,000-that would be very much a typical lend. On their set, that is largely all they will probably do. They won’t get the £500,000 loan from a customer with a turnover of only £250,000. So, yes, they are very much targeted on loans of that size.

Q262 Mark Garnier: But do you see the point that I am driving at? From a commercial basis, if you run any business, you will always target the high-margin part of the business. If administration is part of the job of being a bank, which of course it is-you have got to process the applications, assess risk, credit score and all the rest of it-does it not in very general terms follow that as bankers you would rather lend large amounts relatively easily than lend lots of small amounts of money that carry with it an administrative charge?

Barclays 2: No, the reason being that we look at our business down the lines of the four Cs. If all of our people were concentrating on doing larger loans, we are neglecting the C of customer-we are not giving our customers a consistent experience and service. So, it is not even an issue.

Q263 Mark Garnier: Does that mean you are investing time and effort now in the hope and assumption that your customer will grow into a bigger business?

Barclays 2: Absolutely.

RBS 2: I think there is another aspect as well. For the individual customer, whether they are borrowing £20,000 or £200,000, it is probably one of the most significant purchases that they will make during the time of their business, so therefore we take each one seriously. The key thing for us is to ensure that at the smaller end-for a £20,000 loan-the approach is simple and straightforward, so that it reduces our cost base and makes it easier from a customer’s perspective. So there is no disincentive for our people to lend small amounts of money, because that is about the relationship that we are trying to create.

RBS 1: What I was going to say was that those smaller customers-all our customers-are not interested in the machinery of the bank between them requesting a loan and us actually providing them with the money. So what we do very much is to focus the operating model that sits behind that on making sure that the decisioning process for those small customers is as low cost as it possibly can be to give us the right answers. So what it means is there is no disincentive from an operating point of view to focus on the smaller deals. We can absolutely focus on the very smallest deals because we have driven down the cost internally of actually helping our customers in that space.

Lloyds 2: As the Chairman said at the start of this, we are not CEOs; we are the guys on the ground with the passion for SMEs. I have never thought of that kind of question before. We are there to support in a relationship way all of our SME clients whether they want a £5,000 loan or a £5 million loan. Obviously, there is economics behind it all, but we celebrate the success of the £5,000 loan that helps them employ another person in the business as much as the £5 million. For us as practitioning bankers, that has been a non-issue for us.

Q264 Mark Garnier: Just out of interest-this is my last question-you two from Lloyds, is your background HBOS or Lloyds?

Lloyds 2: Lloyds.

Lloyds 1: Lloyds.

Q265 Chair: We have run on longer than intended and I shall be guilty of doing so even further, because I want to press [Barclays 1] and [Lloyds 1] here on this question of no limits. What from your end of the telescope changed when the credit crunch happened? How did the change in financial conditions show itself to you if you are saying that there is no limit on what you can lend? Is it just that the price of money changed? Did the amount of money change? When the banks were all in trouble in varying degrees in 2008, how did that feed itself through to where you were sitting? I will start with you, [Barclays 1].

Barclays 1: I think from our point of view, what possibly happened before the credit crunch to now is that there has been a change in whether people have got the serviceability and the profit within the business to actually service a debt. Economic times are quite hard for customers and when we are assessing an application, if somebody is, for example, trying to run a pub and the previous tenants have not been able to make it a success, we will then be questioning them very hard as to why they think they can make such a success of it; whereas maybe before the credit crunch, times were good and people were just naturally going out with more disposal income.

Q266 Chair: That is from the customer’s point of view. I am talking about the bank’s point of view. Are you saying that there was never an internal signal in the last five years from within the bank to say to you, "Look guys, the rules have changed here; we are in a different game now."?

Barclays 1: No.

Lloyds 1: No. I think the thing that has changed most in the last five years is demand. We are not getting as many requests as we did before the credit crunch. But despite the credit crunch-I can only speak for my team and my figures-my lending has gone up year on year on year in net terms before the credit crunch and since the credit crunch.

Q267 Chair: So from your seat, there is no credit crunch.

Lloyds 1: No, I am saying that we are having to work harder to find business. I am targeted to lend money; there is no cap on it and our credit policy has not changed since before the credit crunch. I am talking more about Lloyds, where I have experience, than about the Bank of Scotland, where I have less experience. But the policy is the same and if we can find the businesses to fit that policy, we will lend to them.

Q268 Chair: Did RBS give any internal signal that the game had changed after everything that your bank went through?

RBS 2: I think, to be absolutely frank about it, that at the time of the crisis in 2008, there was a great deal of uncertainty across the group before we received the taxpayers’ support, for which we are very grateful. That caused some degree of confusion and people were not sure about what the next steps were going to be, but once that came to its conclusion, we all focused on ensuring that we were supporting our customers.

While we have seen a change in the way we support the commercial property market, to which I alluded once before, our approach to what we call trading SMEs has remained staunch in its support of them through the tough times.

Q269 Mr Love: There is a constant debate about how much we ask banks to do. We are asking them to lend more money, but we are asking them to reduce their leverage. I would have thought that the need to reduce your leverage as banks was imperative and that would have an effect on the amount of money you can lend. Are you telling us that that has had no effect over the last six years since 2007?

Lloyds 2: I can tell you from Lloyds-I have been a regional director for six or seven years, so pre-this and through this-that in my part of the business, commercial banking in the SME sector, I have been able to grow my lending book without limits on a net basis through all of those years. I can say that clearly: we are in strong net growth now; we were in strong net growth two years ago. I cannot speak for the rest of the group in the ways they worked-obviously, as you said-to reshape the balance sheet and so on. But in the SME commercial element, that is the fact.

RBS 1: From the RBS point of view, I would say that our applications in the first half of this year are down about 20% from where they have been previously and we are really concerned about that. We want to lend money to customers and [RBS 2]’s guys and the guys around the country are all out on the ground with our customers looking for opportunities. There is no constraint on that; we very much want to go out there and do the business.

Chair: I really want to call a halt. Thank you all for coming. As I said, our purpose today was to try to understand what you do and what kind of things you try to take into account. That is what we are going to do in other sessions through the rest of the afternoon. For the moment, thank you all for coming.

Examination of Witnesses

Witnesses: RBS 1, Local Chief Executive Officer, Royal Bank of Scotland, RBS 2, Regional Director, RBS, BARCLAYS 1, Branch Manager, Barclays, BARCLAYS 2, Regional Director, Barclays, LLOYDS 1, Branch Manager, Lloyds Banking Group, and LLOYDS 2, Regional Director, Lloyds Banking Group, gave evidence.

Q270 Chair: Thank you all for coming. I will just a say a word at the beginning about what we want to get out of today’s session. This is the consumer and SME sub-panel of the Banking Commission. We have taken evidence so far from businesses and consumers themselves about their experience. The purpose today was really to speak to bank staff in a way that we do not usually get to do in Parliament. We are very used to seeing the chief executives and the chairmen of your organisations here to talk about the overall bigger picture. But we want to get into the wiring today of how things work in terms of the branch and regional levels of the banks. We are trying to understand the bank experience in that way. We have just had a session with the same banks on small business lending. We want to focus on consumers, sales and mortgage questions today. I shall open with that. I should also be really grateful if, when you answer the first question, you could just say a little bit about what job is so that we get an understanding of that. I want to start with sales and I will start with RBS.

There has been a lot of controversy about consumers being sold products in banks that they later think they don’t really need and don’t really want. PPI is the most obvious example. Another example at the moment is these packaged accounts that maybe cost £10 to £15 a month that the banks are pushing. I’ll start with you Tanya. Is there pressure to just sell this stuff? What questions does a bank like yours ask about whether this product is really needed by the customer and appropriate for them?

RBS 2: Good afternoon. I am a regional director in the NatWest brand within the RBS group. I have within my own remit 85 branches and somewhere around 500 staff.

In answer to your question, I guess if we were to take a journey back four or five years-or even three or four years-the culture within the RBS organisation was very different from now. If I look at how we are sitting now, I have undoubtedly within my own team, and certainly within the RBS group, a really strong framework of ability for making sure that when we are sat in front of our customers, it is about our customers and what they need. We do that by ensuring that our customer advisers who offer the face-to-face connection can sit down and have a conversation with them-45 minutes or however long-to look at what it is that they need to have.

If I look at the past, we have not been culturally in that space. I have worked for the organisation for a number of years and seen that change to be quite evident. We did not in the past necessarily always drive the questioning in a way through which we could ensure that the customer’s needs for now and the future were met. We might have been looking at some short-term product in terms of what the customer needs-packaged accounts may be one of those products-rather than looking at their overall financial needs. Certainly, the customer review that we walk through and what we aim to deliver within that are about ensuring that we look at the current and future needs of that customer. I equally have to accept that we do not always get that right, and training our customer advisers is one of our biggest areas of investment so that we help them to have that conversation with the customer.

Q271 Chair: If somebody persuades a customer to take one of these packaged accounts that has a monthly fee, does that person get a sales commission? Or do they have a target where you say, "We want you to get 100 customers a month on to these," or something like that? Is that how it works?

RBS 2: Four years ago it did. Three or four years ago it was very much around products-types of products and specifically how many products. We have not got that culture within our organisation now. It is far more based on service. I am sure we will touch on incentives, but we are certainly not incentivised to sell a product. It is far more around how we own the business, linked in with the customer being at the heart of the service that we provide. You mentioned persuading the customer, and the basis of the review that we do with the customer is to discuss what is important to them. It is a sale, because of course we do sell-I am not going to move away from that-but it is based on what the customer is looking to achieve and their priorities.

Q272 Chair: This is tricky, isn’t it, because I understand a culture where a bank has an advantage in selling PPI and getting people to pay for something that they currently get for free, and if, from a management perspective, you take away the sales commission, why would your staff bother pushing these things? Does that not hurt the bottom line of the bank?

RBS 2: The whole way in which our incentive base is linked to how we reward our staff is hugely about putting the customer at the heart of it. We start off by looking at what the service looks like, how we respond and what customer feedback we get. The incentive base is not based around product sales.

Packaged accounts are clearly interesting products for many different reasons. I was in a branch a couple of weeks ago looking at a customer when, having gone through that review, what they were spending outside our organisation-perhaps on other lifestyle benefits-was costing them more than taking the package as one with a brand behind it that they can trust to deliver. There are absolutely great ways in which we can help our customers, but the whole premise is about ensuring that we have the questions right in the customer review.

Q273 Chair: I will move along to Barclays. Barclays just announced a big change: no sales commission for front-line staff. Can you explain the thinking behind that change and how that would compare with the situation that went before, just in terms of the context of these kinds of products?

Barclays 2: Sure. First, may I say good afternoon? I am [a] regional director for Barclays, which has just fewer than 200 branches and 3,000 staff.

Similarly to what RBS 2 described, we have been on a journey over a number of years to move towards rewarding our staff for service. We have announced that from 1 December the totality of our variable pay, which is typically 10% to 12% of what an employee will earn, will be based on service. This year, 75% of the variable pay of our branch managers is based on service, so it is a small change for them. For our personal bankers, around 40% of their variable pay this year is based on service, and the rest is based on the solutions that they provide, or the products that they provide to their customers, but those are products across the broad product spectrum, rather than mono-line product solutions.

Q274 Chair: [Barclays 1], you are a branch manager. Is that correct?

Barclays 1: That is correct.

Q275 Chair: From your perspective, in terms of your staff who are working in the branch, what has been the incentive for them to push products such as PPI in the past, or packaged accounts today-or other similar products?

Barclays 1: Good afternoon. I am [a] branch manager of Barclays and I have about 40 staff working under me.

With regard to the packaging of accounts, we measure our guys on the service aspect, as we have already mentioned, and we look for customer satisfaction and advocacy. We do not want products pushed because that would have an adverse effect on the service. Certainly, we look to help our customers so that they come back for repeat business or recommendations. You mentioned the current account with the add-ons.

Chair: Yes, all these insurances, such as mobile phone insurance.

Barclays 1: Recently-I might need some help on exactly when, but it was a few months back-we changed our current account package, and you may have read about that in the press and so on. We now have a current account to which you can add on packs; some may be free, such as online banking or mobile phone banking-text alerts and that type of thing-and some may involve a fee. The customer can switch in and out of the products that they need. In terms of incentives for our personal bankers, those solutions offer no incentives under the existing scheme.

Q276 Chair: At branch level, how big a culture change would the recent announcement by Barclays make to sales commission? Do you see that as a big thing or small change at branch level?

Barclays 1: No, it wasn’t a surprise. We read the financial press and we can see the way in which the culture is moving. For example, as a branch manager, my incentive for the past two years, I believe, has pretty much been service-based, and the service incentive for the staff is probably the one that we talk about all the time. The fact that the incentive has gone totally service-based wasn’t a surprise at all.

Q277 Chair: It would be unfair on you to give a verdict on this, but from what I am hearing, if this Commission were to recommend that sales commission were to be banned, we shouldn’t expect any push back from the banks. It would be saying that that was the direction of travel, but perhaps that is something for us to consider. What about Lloyds? To what extent are your front-line staff within the branches incentivised on selling what I would regard as non-core products, such as insurance or packaged accounts?

Lloyds 1: Hello, I am [a] manager.

Similar to Barclays 1, I have about 40 staff. Our front-line bonus system works on the basis that, to start with, we have a risk gateway. Effectively, to be eligible for the bonus, the staff have to meet their risk criteria, and that is different for each role. We then have a service element, and that element is based very much on what our customers are telling us about the service and how we are recognised against our peer group. There is also a "meeting customer need", or sales element. In terms of the work of customer assistants-the subject of the question-they have a sales objective of a certain number, and if they go beyond that, they will achieve a bonus. Typically, a bonus for a customer assistant is around about £230 a quarter, which equates approximately-I might need to clarify the figures-to between 7 and 8% of their salary.

Q278 Chair: Of your 40 staff, do most of them get that, or is it only a small number within the branch?

Lloyds 1: I would say that 80% get it.

Q279 Chair: Have you had a discussion within Lloyds about a change in the bonus structure similar to the Barclays announcement?

Lloyds 2: Shall I take that? We are structured slightly differently, so my job title is network director. I worked at Lloyds for 28 years, and did pretty much any job in branch banking.

In answer to your question about whether any thinking is going on in that area, there is a review of our incentive programmes at the moment, which I think has been publicly stated. I would not want to predict the outcome, but the early thinking I have heard about leads us to believe that we should expect the continuation of some variable pay for people who work in branches in all roles, but what we point the variable pay at is likely to be far more skewed towards service.

The second level of change that we may expect is the removal of sales incentives at individual level, but we would probably expect to retain some level of variable pay for success across the wider business. My judgment is that no individual would be able to sit in front of a customer and recognise how much he would earn as a result of a recommendation that he might make, but that if the business he works in is broadly successful, we would expect an element of reward pointed at growing the business.

Q280 Chair: I want to change the subject a bit and go back along the table to ask you about a product that is among the most common that customers go to a bank for: a mortgage. You said you have had several decades’ experience in Lloyds. How has the change in mortgage products, in terms of the move from feast to famine, expressed itself at branch level? What have the signals been from higher up in the bank that the rules have changed on how to lend mortgages to people? This is a problem for us as MPs, because young people, especially, are coming to us saying that although they are earning good money, they cannot get a mortgage because the loan-to-value that banks and building societies want is so high. In your experience, how has that changed?

Lloyds 2: I perhaps wouldn’t go over the three decades, but perhaps the past two or three years are the most relevant. What I noticed in the immediate wake of the financial crisis, when the issue was at its worst, was quite a dramatic tightening of lending criteria. Over the following two or two and a half years, we have gradually reverted to the position that we would have been in before. In other words, we saw across the industry loan-to-value acceptance criteria being reined in dramatically.

At Lloyds Banking Group, loan-to-value is now back at 90%, which is a little less than where it was when the financial crisis was at its worst. We have seen two more things recently. The bank is far more proactive in working with local authorities under the local Lend a Hand scheme, under which the local authority is able to give a guarantee for part of the deposit, which means that it effectively underwrites part of the deposit, and we can therefore lend up to 95% to first-time buyers. That has been a significant part of our strategy for the last 18 months.

The second thing that we are seeing coming through in terms of showing that we are open for business is that, probably four weeks ago, we drew down from the Government’s funding for lending scheme in two respects. One was for SMEs-I do not have too much to say about that-but for mortgages particularly, we have introduced a product that has been missing for the period I talked about: a seven-year fixed mortgage opportunity specifically for first-time buyers at a competitive rate, supported by the scheme. It is early days for that, but a first-time buyer now can get the advance he is looking for if he has a deposit of 10%. He can get stability over seven years. People are particularly worried now about the fact that we are in a low part of the interest rate cycle. Clearly, at some point, that will turn, and that is something that bothers first-time buyers, so extending longer periods for fixed terms is really important for first-time buyers now. We put that out there three or four weeks ago, as I said. It is early days, but about £4 million in advances has gone into that product so far.

Q281 Chair: You talked about a loan of up to 90% of value. Do you also check income multiples and credit scoring? Do they matter? Are these things checked as well as the amount of cash a buyer can put down?

Lloyds 2: Yes. I am not going to try to describe in detail and line by line how what we call the affordability assessment works. I think consumers typically still think in terms of income multiples and the multiplier, which many of us will have used when we got our first mortgage. We are less focused on that because gross salary is a less reliable predictor of a customer’s other current liabilities. The fact that someone earns £40,000 a year doesn’t mean that he has the same expenses as somebody else who earns £40,000 a year.

Chair: He might have kids.

Lloyds 2: I think your question was: are the checks thorough?

Q282 Chair: I am trying to get a sense of what you are looking at. Obviously the amount of down payment is one factor, but are income and credit history also factors?

Lloyds 2: Credit history is important and so is the current assessment of affordability, which takes into account the customer’s current liabilities.

Q283 Chair: [Barclays 1]-the branch manager, not the regional manager-you will have long experience of this. There has been a very sharp change in mortgage conditions in the past few years. What is the signalling process within your bank when something like that happens-when you go from an easy lending environment to a much tougher one? How do you receive the signal?

Barclays 1: In the branch network, we have mortgage advisers who will help. We also have an area mortgage adviser, who concentrates a little bit more around exactly how they carry out their role. It is not something I get directly involved with, but obviously my customers need help with their mortgages, etc. Where I am based, we have some very high-value customers and the mortgage market is fairly buoyant. We have some very experienced mortgage advisers who look to help customers across the board. We now have mortgages down to 95% for first-time buyers.

Q284 Chair: Presumably you would pay a stiffer rate on that than on a 90% or less.

Barclays 1: Yes. The rates are higher for lower deposits, in general.

Barclays 2: There is a risk. We are not involved in the pricing, but there is inevitably a risk. There is an amount of deposit calculation that enables us to work out the prices. We have remained open for businesses for mortgages throughout the financial crisis period. The signal that people would see in branches is around the products that are available and the rates. What we have seen is similar to what [Lloyds 2] has described in Lloyds-very much a moving back into trying to find ways in which we can help people. We have a 95% offer for first-time buyers. Like Lloyds, we are working with builders to understand how, perhaps with some subsidies, we can help people get onto the housing ladder.

Q285 Chair: [RBS 1], we have not asked you anything yet, so I want to ask you about this. Do you think young people-people who are first-time buyers-are accepting of these changes in conditions, or do you think that they resent the fact that older people got it much easier when they were buying property, when they are now being asked to eat their greens, save their money and fulfil far more conditions before they can get a mortgage?

RBS 1: Good afternoon, I am the local chief executive role at NatWest, RBS. I am currently looking after 10 branches, with approximately 85,000 staff-sorry, 85 staff. Gosh, I hope that I am not looking after 85,000-it feels like that sometimes. Previously, I ran the high street branch as branch manager.

We were going through a period of not helping our younger customers, or first-time buyers, by offering 95% mortgages, and, given the climate we are in, they found it difficult to get the 10% deposit together. In order for us to help them, we are asking for only a 5% deposit, and I feel that customers are open to that, because by only asking for 5%, we are helping them, and with the cost of living it is difficult to find a 10% deposit in the climate we are in.

Q286 Chair: And RBS are doing 95% mortgages as well?

RBS 1: Yes, for first-time buyers.

Q287 Chair: Okay. My final point, before calling on my colleagues, is on this area of sales. One commentator has described the culture of banks as moving away from duty of care and towards buyer beware; in other words, putting much more onus on the customer to beware of what is being sold to them. Do you think that there is a case for, somehow, bringing that duty of care back into the rulebook, rather than just being something that we encourage, [RBS 2]?

RBS 2: I can understand why, bearing in mind some of the legacy and challenges that have surfaced over the last three or four years, certainly since the main banking crisis-and leading up to that period, as we have seen with the fall-out through PPI-the public would want to feel that way. However, I believe that, in the last three and a half years, we have started some very strong work around helping our customers regain their trust in us. We have worked very hard around the culture to put the customer truly at the heart of what we do.

We recognise that that will take time; it will not happen overnight as it is a cultural shift and a piece that we will have to work very hard at. But the pieces that put that jigsaw together in the branch are based on what our customers need from us, what the service looks like, how we make sure that we keep things as simple as we can, and demystify a lot of what goes on in banking, to help our customers with their needs.

I know, working with our customers and from the feedback we get, that the front-line staff are certainly getting and understanding that culture very much. We now have more staff working in the front line-actually serving in front of the counters and talking and engaging with customers as they come through to find out what their needs are-than ever before. We still have a long way to go, but that is absolutely the path that we are committed to be on.

Q288 Chair: Anything else on the duty of care-are you aware of this debate, [Barclays 2]?

Barclays 2: I think we are working very hard, and understand our responsibilities, to restore customer and public faith. On our journey over the last few years, we have had customers at the heart of what we do, to the point that, now, 92% of our customers who come into our branches-we survey 18,000 customers a month-are completely satisfied with the service that they receive. That survey, which is done independently for us, asks the customers about the appropriateness of the products and services that they were offered. So, every single month we have a litmus test of how we are exercising that duty of care. I think that we have got to continue that self-regulation.

Q289 Chair: [Lloyds 2], what do you think of this duty of care debate? Would that make a difference to how you behaved, or do you think that banks are trying to do this anyway?

Lloyds 2: I think that if you had asked that question before the conduct agenda had become more widely understood in retail banking, I may have given you a different answer. I would say that, in terms of the conduct agenda, we are now in the second, or maybe third, year of embedding that approach into our businesses. And what do I mean by that?

Q290 Chair: Yes, what do you mean by the conduct agenda?

Lloyds 2: If I am talking to you as a customer, I need to demonstrate both to you and to the organisation that any recommendations that I make to you are suitable for your needs and that I can evidence that they are suitable; I need to evidence that they are affordable for you and that you can afford to pay for them; I need to evidence that they are sustainable, which means that you could continue to pay for that product over its intended lifetime; and I need to prove that the product is understandable by you through that conversation, and document that.

The second layer that I think has changed quite significantly is this: that responsibility is there and it is very clear-I think it is the clearest it has ever been and is a significant step forward from the TCF, or treating customers fairly, regime. However, just making the requirements clear does not necessarily solve the problem, and so what I think we are seeing across the industry is far more focus on outcome testing-in other words, independent, post-sale contact with customers, so that we can be sure that we met those four criteria that I spoke about. So, without making the answer too long, if you introduced a requirement for a duty of care today, I think that would be a new way of describing what we are embedding in our businesses now through the conduct agenda.

Q291 Mark Garnier: Just out of interest, are any of you members of the Chartered Banker Institute?

RBS 2: Yes.

RBS 1: Yes.

Barclays 2: Yes.

Mark Garnier: All of you?

Lloyds 2: No.

Mark Garnier: You are not?

Lloyds 2: No.

Q292 Mark Garnier: Do you think it is a good idea for bringing about excellence in the industry?

RBS 1: Yes. It makes us more professional in our goals to give our staff the opportunity to become accredited. From a customer’s perception it makes us look far more professional. It is something that we are strongly rolling out at the moment, particularly in our south area. It certainly makes bankers more professional in what we do, and I hope that that will be recognised by the public.

Barclays 2: I think we have clearly stated that we would support any review of that in terms of the Chartered Institute of Bankers. I have also been in Barclays for over 30 years, and certainly when I joined the bank it was a requirement, if I wanted to progress, that I completed my banking exams and became an associate of the Chartered Institute of Bankers. So in some ways it is a little bit of a return to how we used to appoint many years ago.

Q293 Mark Garnier: It is obviously not compulsory, then, in your organisations, to be a member?

Barclays 2: No.

RBS 1: It’s coming in.

RBS 2: Certainly for our customer service officers, we are rolling this out over the coming period, and during the next year, we are looking to have roughly 3,000 of our CSOs going through that qualification, through internal accreditation and through working alongside the chartered bankers. It will also support them, because it will give them an external qualification as well. Our whole aim is that it is going to drive professionalism back into where we probably saw it, as this gentleman said, a few years ago, where it was more compulsory. The external examination isn’t compulsory-

Mark Garnier: Isn’t?

RBS 2: It isn’t compulsory. However, as an organisation we are going to be supporting that and funding it when our people would like to take that qualification and pursue it. It is very much going to be encouraged throughout the different roles in the organisation.

Q294 Mark Garnier: On a different subject-let’s start off with Lloyds-how do you go out and find customers? What do you do to attract customers and where do you find them?

Lloyds 1: Personal customers?

Mark Garnier: Yes.

Lloyds 1: Our current marketing campaign is very much around current accounts. It is an extremely competitive market at the moment. We have an offer that pays a very good rate of return on our current account at the moment. Similarly to what [Barclays 2] was saying about the way we do the interview, when we are talking to our customers we are looking to try to encourage people to switch their accounts across to us. Obviously, through our normal day-to-day business there are recommendations, as well: if we have given good service, we will ask for a recommendation. In my particular part of the business, we are a university town, so we have very strong relationships with the colleges and universities, where we attract student accounts, and so on. So there are a multitude of things. We work with our commercial partners, as well, to see if there is any way that we can try to win businesses across that way-sorry, the personal accounts of business customers.

Q295 Mark Garnier: So in the case of students, you are looking for a positive first-time bank for a first-time customer?

Lloyds 1: Yes. There are a whole multitude. Some of them are mature students.

Q296 Mark Garnier: And is that generally the same for all of you? Are you all doing that sort of thing-obviously advertising campaigns?

Barclays 2: I would describe our approach in a very similar way. I think there are a couple of other things. In more deprived areas, we tend to work closely with the citizens advice bureaux. We pride ourselves on offering a basic bank account, and certainly a lot of the citizens advice bureaux recommend that customers come to see us. Similarly to our colleagues in Lloyds, we work very closely with our corporate partners and corporate businesses to go into those businesses and offer banking services to their employees. An example of where we are doing that at the moment is with Aviva in East Anglia, where we are working very closely on site and trying to get on-site facilities to support people in getting banking.

RBS 1: RBS has what is called MoneySense. We go out to schools and talk to them about running bank accounts and what it involves, giving them the knowledge that they will need for when it is time to look at opening a bank account: how it should be run and what support we can give them. Our managers and customer advisers go out to the schools when children are at a young age.

Q297 Mark Garnier: That is quite an interesting point you touch on, because I am aware that all your banks go into schools and help people. My next question is more about the financial literacy of your customers. Obviously, I do not necessarily want you to condemn your customers as being not very clever about it, but do you find as a general comment that the population as a whole is financially literate, or do you think there is still a problem of people not understanding money in any real sense?

RBS 2: I think there is a need to assume that people need our help with understanding their finances. That is not necessarily to say that people are financially illiterate, because everybody has differing understanding. Clearly, working in the industry provides us with the privilege of understanding the financial world and the products and offerings. The important piece around whatever customer is sat in front of us is that they have the opportunity to sit down with one of our advisers to look at what their circumstances are, because everybody’s circumstances are different. We would never look to assume that people fully understand that, because products, offerings and services change all the time.

It is and can be complicated; it can be quite difficult to keep up with everything in the marketplace. One of the things that we are working hard on is trying to simplify the literature and products so that our customers can make advised choices about the right thing for them. It is about trying to make sure that you have got enough options for everybody, so that we can help different people with different levels of understanding around the financial services world.

Q298 Mark Garnier: Either [from Barclays], do you agree with that? Do you think that the pressure of websites like Moneysavingexpert.com has forced you to respond in a way that means you have to provide more help for your customers?

Barclays 2: I would not necessarily personally recognise those websites. If [we] look across London, [we] have a real range., in the City [we] have some very sophisticated customers who have a very good knowledge of finances and banking, but then [we] can move out to east London where the customer base is multilingual and the speaking of English is quite limited. We work very hard in those communities to recruit staff who mirror the communities that they are in and can help us to speak those languages. That is a starting point for explaining how things work: even just how the kit works in branches and how they can get access to the money that they have paid in. The education programmes that we have already described-going into schools, charities and local support groups and doing that education piece-are really important. We are also in a fairly early stage of trying to help people understand their creditworthiness, how to build a credit track record and the sorts of thing that enhance or damage their ability to build a track record.

Lloyds 2: I think financial literacy is an issue with potentially quite significant implications if we do not do something about it. We know that we have a population that is broadly undersaved and underprotected, and will not have great retirement plans. I do not say that that is entirely due to financial literacy, but it can only get worse unless we do something about it.

Q299 Mark Garnier: Do you think the Government should do more? Do you think they should put financial education on the curriculum?

Lloyds 2: My wife is a school governor, and she would say that it is absolutely necessary for us to teach children more about money, what is important and how to manage it. But she would also say that the school doesn’t necessarily have the expertise or the wherewithal to deliver that, so it is reliant on people coming in from the industry to share some expertise. I think that that is a good thing.

Q300 Mark Garnier: On a slightly different subject, going back to the transfer of accounts, what are the main reasons people leave your banks? We can start with Lloyds.

Lloyds 2: I will just give you the facts. Why do they leave? Either because we have failed to deal with what I will call a specific moment of truth-something that has happened that is a significant event for them-and they are dissatisfied. That might be one cause for them to leave.

Mark Garnier: Ill feeling.

Lloyds 2: The customer might conclude that they been let down at a moment when they needed the bank to do better. They may also leave because they are attracted to a different pricing policy, or a different product, from one of our competitors. They may leave because they are recommended to do so by somebody else that they know who has a positive, or ongoing, relationship with a competitor.

Q301 Mark Garnier: Account switching is quite difficult-people still find it quite a challenge to move banks.

Lloyds 2: I would agree with you that people think that it is very difficult; I think the reality is quite different. If I look back over the last couple of years at the difference that all the banks have made in terms of being able to switch between providers, I think that the actual experience is quite different from the perception, so we still have to do more to show people that you can do that.

Mark Garnier: I have to say I have just done it. It has been six weeks of utter hell, but you will be pleased to hear that none of you were involved.

Lloyds 2: I suppose the last thing I would say on switching is that we know that, through the ICB, the banks have proposed a significantly different switching mechanism, which I understand has been accepted and will be delivered in the autumn next year. So your six weeks would be seven days-

Mark Garnier: Of hell.

Lloyds 2: Well, of comfort, I would say, in a way that is more controllable by you. So the perception-

Q302 Mark Garnier: It’s a slightly unfair question-there is a lot of stuff going on. Do the other two banks concur that those are the general reasons you would lose customers?

Barclays 2: I would concur, broadly, with what [Lloyds 2] said. The other thing is that sometimes it is difficult to analyse, because you don’t always know that people have switched or gone away; they tend to let the account lie dormant, or not do anything with it, as opposed to making that physical move. We need to do more, and we are looking to do more, to understand whether perhaps customers are becoming unhappy with the relationship, and to ask what the indicators are that suggest that they might be in that space. I think we need to be more proactive with those customers, to understand what we need to do better for them.

Q303 Mark Garnier: There is just one last question I would like to ask, if I may. There is a big accusation that, as a retail bank, you have huge amounts of access to data on people’s spending habits and the amount of money that they have in their accounts, and that this gives you a great deal of advantage in terms of selling products such as credit cards and financial advice, that kind of stuff. Starting with RBS, in your experience, do you think that that is a justifiable criticism or accusation? Would you use those data in order sell products to customers?

RBS 2: We do have customer data, quite clearly, that we access and maintain. Where I see it being used in absolutely the right way is when we are helping our customers, perhaps where we have better products that have come on stream, or to help them with some form of service on their account. To give you an example, one of the very successful service options that we have now had for more than 12 months is around text-alerting customers when they get near their overdraft, or when they are going to go over it. It is a perfectly acceptable overdraft, which has been agreed and is not challenged, but by helping them to understand that through a text alert, it allows them to manage their finances just a little bit more easily, without necessarily having to come into a branch.

We have customers on a database whom we can contact to talk about the service option that would be best for them. Equally, off the back of some of the customer reviews that we do, we talk to customers about whether they would be interested if we had the next best mortgage deal that came along-would they want us to contact them? That would be the right thing for them at that time, so we do use data in a positive way to help and support customers around their needs. There are a lot of databases that can be used. I come back to your earlier point about financial literacy; making sure that they are aware of what is going on-that is where our duty of care falls into it.

Barclays 2: We have something called intelligent prompts. They use the data that we have about the customer to prompt us, if the customer is in the branch and we are talking to them, to talk to them about something that will potentially make or save them money. It is about how you have that conversation and the controls that we have in place to make sure that the appropriateness of any product solution that the customer takes is right for them.

Similarly to what my colleague has described in Lloyds, we survey-this is separate from our customer surveys-about 8,000 customers a month who have taken product solutions to make sure that they understand what the product is, why they have taken it and the appropriateness of the choice that they have made.

Q304 Mr Love: May I, in a sense, go back to square one? I want to ask the bank managers with us this afternoon-and perhaps, on behalf of RBS, you, [RBS 1], as a very recent bank manager-what is it expected that you and, above you in the organisation, your branch will achieve? What incentives are there for you, as the manager, to achieve them? Let us start with [Barclays 1]. You have the same tie on, so I cannot say I assume that it is a Barclays tie.

Barclays 1: It is indeed. Just to clarify, you mentioned the solutions that we offer and the incentives around solutions.

Q305 Mr Love: No. Your regional manager has an expectation of what you, as a branch, will achieve. What is that expectation, and what incentives are there for you to achieve that?

Barclays 1: We have at Barclays what we call the four Cs: the colleague, the customer, citizenship and the company. Each year, we will draw up a plan of how we can help our customers in these four areas. Each branch manager would do the same at all the branches within Barclays. We also have a document that is produced each year called "Our branch and our markets". It is a pack of information regarding trends and markets within the area.

What I did last year, for example, was to have a conversation with my premier team, my mortgage team, my business team, my personal banker team and my cashier team and, in other words, involve the whole branch in forecasting how we can help our customers. You mentioned mortgages earlier. We would then agree goals to say, for example, how much we think we can help our customers with mortgages in 2012. We would agree goals along different solution lines. We would also agree goals around the citizenship agenda and how much we would raise for Macmillan-that type of thing.

Q306 Mr Love: Let me try to focus you. A lot of that sounds rather pious, if I may say so. We must be fair to our customers. I am sure that that is in the statement somewhere. What quantifiable pressure is on you? Do you have to have a certain number of mortgages? Do you have to open up a certain number of bank accounts? Are there incentives within that for staff and for you, as a branch manager?

Barclays 1: We have probably been doing this for about four years now, and it works. We in the branches would agree, for example, how many mortgages we would do. We also have areas. we would add up all our goals in the [area], and usually find that that is higher than what the area wanted to achieve. We would then work towards those goals, helping our customers to achieve those goals. In terms of incentive for branch managers, as my colleague [Barclays 2] said, most of the incentive for us is purely around service. We live and breathe service. That is why we do the job.

Q307 Mr Love: So you do not have any incentives for getting more accounts.

Barclays 1: A small part of our incentive is based on how we look after new customers coming into the bank, but no. For example, for mortgages, if I exceed my goal, as far as incentive is concerned, that would not have any impact; and if I failed to meet my goal, it would not have any impact on incentive. Obviously, I have my annual review, and that is quite important to me, and for most other people.

Q308 Mr Love: I understand that, but is your annual review incentive-based? Are the questions you are asked at your annual review, "How many new mortgages?" and "Why haven’t you achieved the goal?"? How do they quantify service? Do they do regular interviews with customers, in particular customers who might be leaving, and do they comment on why that happens? Tell me more about how your annual assessment is reached.

Barclays 1: Great question. I mentioned the four Cs-the colleague, the customer, citizenship and the company-and my annual review is based around those four things. For example, we are quite proud at the moment that we raised almost £10,000 for Macmillan recently, which was a great buzz for the people. Obviously that is a good thing, and also it would affect your PD-not that that is a good reason to do it; it is not. That is the sort of thing that would be discussed.

You mentioned service in particular, and that is pretty much the non-negotiable. [Barclays 2] mentioned that we would need to achieve 92% of our customers being completely satisfied. As for how we do that, our customers are called. If you visited [a branch], you could get a call from the company, and you would be asked how satisfied you were with the service received from [the branch]. For me to score well, I need you to say that you are completely satisfied. If you are neither satisfied nor dissatisfied, or you are dissatisfied, basically I would see what we call a red flag, because that has not met the standard. I need my customers-that is why we pride ourselves on our service-to say "completely satisfied".

Q309 Mr Love: [Lloyds 1], tell me about your circumstances at the branch level.

Lloyds 1: Okay. I have an annual balanced score card, and that is my annual objectives. That covers a range of objectives, but broadly, it is to make sure that I meet my risk requirements; it is a customer service objective, which is based on independent calls to customers; it is meeting customer needs, which is sales; it is based on meeting my cost objectives; it is based on people development-on how I develop my team and my people within that; it is partly based on process conformity, which is if we are following the process, as we need to; and there is a bit in there about complaints and if we are delivering fair outcomes for customers. So that is my balanced score card through the year.

Q310 Mr Love: And are each of those different parts of the score card equal, or are some more important than others?

Lloyds 1: There are different weightings on those things. What you have at the end of the year is a rating-1 to 5 effectively, for simplicity-1 being the highest and 5 the lowest. You get different weightings on those elements throughout the year.

Q311 Mr Love: Would I be wrong in suggesting, as others have, that the sales weighting is higher than others? Is that the predominant feature of your review?

Lloyds 1: No. It is a balanced score card. Customer services is probably the single biggest or equal single biggest rating. Sales is certainly part of it, an element, but it is not 50% sales or anything like that. Basically, we get a rating of 1 to 5 on that, and that effectively is how we are judged.

Q312 Mr Love: [RBS 1], I will assume that RBS has a similar type of scheme, so perhaps you could go on to comment on how customer dissatisfaction is measured by outside organisations. I need only look at the increase that there has been in consumer complaints to the Financial Ombudsman Service; they have gone up markedly, though admittedly most of that is to do with payment protection insurance. How can we have such a difference? Most banks seem to hit regular 90% customer satisfaction ratings, and yet there is a great deal of dissatisfaction out there.

RBS 1: Linking back into how we measure that at branch level-is that what you are asking?

Q313 Mr Love: Well, tell me how you measure it and give me your estimate of why that produces, if it does, 90% satisfaction ratings, given that there seems to be quite a lot of dissatisfaction out there.

RBS 1: Yes. There is dissatisfaction out there. To be completely honest-we need to be true to ourselves-we do not get it right every time. The most important thing is that we are learning and taking appropriate action to be better for the future. We take complaints very seriously, particularly at RBS in the past couple of years, because at branch level our incentives can be completely wiped out by a failure with complaints. That is something that we did not have before. We are taking a much more serious approach on it.

Customer service is our key driver for incentive purposes. Contribution is at the bottom of our three key measures: service, balanced growth and contribution. That is what our incentives are based on at branch level at NatWest. They can be completely wiped out, regardless of what we have done with those three things, if we have a failure with complaints. We survey our staff every quarter to measure us as managers, so if the feedback is poor, our bonus will be wiped out, because obviously we need our staff to be happy. If we are not meeting our commitment to serve our customers in under three minutes, it can wipe out our whole service bonus as well.

Q314 Mr Love: [Barclays 1] has already answered this question about basic bank accounts. Do the other two banks represented here go out and seek basic bank account customers, and do you treat them in exactly the same way as your other personal current account customers? I am looking for a brief answer because I want to move on. There is a lot of evidence, particularly from east London, that basic bank account holders find it difficult to open accounts. They are often told by a branch to move if there is a branch down the road-there are some accusations between your fellow building societies and banks in relation to that-and they do not get treated very fairly when they come into a branch. I am trying to get your impression of how you treat basic bank account holders in relation to ordinary current account holders.

Lloyds 1: From my perspective, we would do it exactly the same.

Q315 Mr Love: So you market basic bank accounts?

Lloyds 1: Our current marketing campaign is based around Vantage, so it is not on a basic bank account, but if a customer comes in to open an account, we will open an account-for everybody.

Q316 Mr Love: [RBS 1], do you market basic bank accounts?

RBS 1: We made a commitment that all customers would be able to have a basic bank account, depending on their situation. I think that I know where you are going: ATM withdrawals. Am I right in thinking that? I will talk about that.

Q317 Mr Love: There are all sorts of changes that basic bank account holders have experienced, and other bank account holders. I do not want to get into it; I am just trying to get the experience. For example, some banks do not allow them to go into the branch itself.

RBS 1: We allow all our basic bank account holders all branch services. Much the same as any other type of account holder, they can do everything over the counter-they can use our branches and all our ATMS.

Q318 Mr Love: We attended a consumer panel meeting at which many of those present said that they felt harassed when they go into branches, because everybody is trying to sell them something, and that is shown and reflected in surveys. Do you recognise that? [Lloyds 1], do you harass your customers to buy products?

Lloyds 1: The biggest driver for me in my branch when a customer comes in is to get them served quickly. We are a busy city centre branch with complex transactions due to the volume of traffic we get. My objective, first and foremost, when a customer comes in is to get them dealt with as quickly and efficiently as possible. If one of my staff identifies an opportunity where we feel that we can enhance the customer’s situation, I will encourage my staff to talk to the customer and offer that opportunity, or at least offer the customer the chance to say no.

Q319 Mr Love: [Barclays 1]-I do not want to get into the issue of PPI mis-selling, but the evidence from that was that a lot of people who were sold PPI did not even know they were being sold PPI. A lot of people who were sold PPI took it out against their wishes because they were pressed very hard by sales staff. We do not seem to be able to recognise any of that in what you are saying. I do not want to get into PPI specifically, but what is your experience in terms of the efforts that your staff will make, because of the incentive schemes, to sell products to customers when they come into the branch?

Barclays 1: I suppose I go back to the service ethic. If we are selling products, as you say, that are inappropriate, we will not get repeat business or recommendations, and that is not the way I want to run my business. I will just add one more thing. We also have a business quality dashboard, so that if we are selling inappropriate products, the personal banker or whoever it is who has sold those products will fall foul of one of the business quality dashboard measures. That means that they become a red colleague, which is not great for their PD. They will be taken out of incentive-

Q320 Mr Love: [RBS 1], the FSA recently produced a report about inappropriate incentive schemes. It highlighted a number of issues related to customer experience that I do not think anybody here would want to be associated with. Indeed, it appears to have started a process of re-evaluation of incentive schemes. Do you recognise any of the-I do not want to use words such as "harassment"-sales pressures being put on customers to buy products that might not be entirely appropriate for them?

RBS 1: If you had asked me that question five years ago, I would be saying that unfortunately there were instances of that possibly happening, but moving forward, because we do not get any more benefit from selling something, whether it be home insurance or a mortgage, and because it is actually needs-based selling, I truly feel, working at RBS now, that there is no extra pressure to sell one product as opposed to another if it is more income-driven and not necessarily appropriate for the customer. Things have changed considerably in the last four or five years.

Q321 Mr Love: Let me ask you one last question. It relates to the move that Barclays has already announced, but I suspect it is being actively considered in all the major banks. From what you have told us today, I would make the assumption that when you move away from sales-based incentive schemes to customer-focused incentive schemes, nothing will change. It is already there; it has been there for some time. "All of this problem that has been created by consumer groups reacting to sales pressure and all of these figures from the financial ombudsman do not mean anything-we’ve already changed." How do you respond to the concern that even if you have already changed, things have not improved?

Barclays 2: As I said earlier, I am not for one minute sitting here claiming that we have got everything perfect, we are now doing everything brilliantly and there is nothing that we can continue to develop and look at, in terms of how we look after our customers, but I think we have moved forward massively in the last few years. The complaints figures have myriad things in them. You alluded to the PPI figures yourself, Mr Love. When I look at the figures I see for my branch network in London, my complaint volumes are falling. We look at complaints at a really detailed level. I would not be getting 92% of my customers telling me they were completely satisfied if we were not moving in the right direction, but I fully accept we need to continue that journey.

Chair: Thank you very much for your time this afternoon. What will happen now is that we will consider everything you have said and feed it into the wider banking commission, which has been asked to report by the end of the year, but for today, thank you very much.

Examination of Witnesses

Witnesses: Steve Cooper, Chief Products and Segments Officer, Barclays, Martin Dodd, Customer Services Director, Lloyds Banking Group, and Chris Sullivan, Head of Corporate Banking Division, Royal Bank of Scotland, gave evidence.

Q322 Chair: Thank you for coming. You come to us at the end of something of a marathon of consumer and SME banking this afternoon. We have had one session with some of your SME relationship managers-or, perhaps more accurately, their managers. We then saw some branch managers to talk about incentives and so on. I want to ask you some policy questions. The first is on how people are paid. Barclays has just announced a change, saying that there will be no front-line sales commission anymore. Steve, can you explain the thinking behind that change?

Steve Cooper: Yes. I would not say that it is revolutionary. It is a journey that we have been on for some time, probably the last four or five years, to gradually move away from financial incentives to promote product. For some time, a large amount of that incentive has been geared towards customer satisfaction with that member of staff. We intend to move entirely to that from 1 December.

Q323 Chair: Are the other banks thinking about or in the middle of making a similar change to avoid the danger of inappropriate products being pushed on customers who may not need or even be able to afford them?

Martin Dodd: I will go first. We have announced that we are currently doing a review of front-line incentives. That review is nearing its end. What are we looking at within that? We are looking at what the right mix is, in terms of how we incentivise our front-line colleagues. We have not made a conclusion yet; it is still looking at the detail. We are definitely looking at much more of a service theme for front-line colleagues, and at the incentive around what I would call a team, rather than an individual. We are definitely looking at what is the right way to use variable pay with our colleagues on the front line. I would expect our review to be finished before the end of the year, so that we can put that in place for next year.

Q324 Chair: Chris, what is RBS doing?

Chris Sullivan: We are doing it the way that we did three years ago. My guys are on a fully discretionary scheme that is based around a whole set of things. The last thing that I am going to incentivise them to do is flog products to people who do not need them. All of banking is a service, so I dislike the word "products" and the term "sales" as well. Everything we do is a service, and on that basis-

Q325 Chair: Let me give you a concrete example, which we just discussed with your other staff. On these packaged accounts that you are selling at £12 or £13 a month, is there no incentive on any staff member to get customers to adopt those? I would be surprised if there was not. After all, by doing so, you can get somebody to pay for something that they are currently getting for free with a bit of mobile phone insurance thrown in.

Chris Sullivan: Sure. That is in the retail side of the bank. I look after the corporate side. I did away with everything in corporate at that point, so it is fully discretionary around a whole set of things around financial, risk, and customer service. Basically, my guys are told that there are only three things that they can do to a business customer. They can help them to be more sustainable, help them to be more efficient, and help them to grow if want to. Everything is based around that with a risk envelope to ensure that we do not do anything irresponsible as a whole. I understand that my colleagues in the retail side have a points system, which is related to the same sorts of things. So there are checks and balances, so there is nothing that is completely correlated to selling a product. You would want people to be providing the appropriate product at the appropriate time, so they are absolutely asked to investigate the opportunities to be able to provide those kinds of products for customers appropriately, on a needs basis only.

Q326 Chair: Okay. I want to move on to another policy area. We might as well as start with you, Steve. On duty of care, there has been some policy discussion on asking banks to have a legal duty of care for their customers, seen partly as an antidote to a culture that has grown up of "Buyer beware", in terms of the customer going in and being confronted with a number of different insurances and products that they may or may not need. What would Barclays’ response be to attempts by people like us, or Government or regulators, to introduce a legal duty of care to customers?

Steve Cooper: I would welcome it if it is done in the right way. What I mean by that is that there has to be a responsibility on the bank for the financial well-being of its customers, and I think society in general. Barclays and banks, and colleagues who work for Barclays and banks want to do the same thing, but I do not think that a bank should absolve a customer-a consumer-of also sharing that financial responsibility.

If I may give an example, I have been banking for 25 years, and when I first joined in the mid-80s, straight from school, I remember that the bank was checking whether the buildings insurance policy was in place on a mortgage for a customer every year. In my view, the bank has a responsibility to ensure that customers are informed about the importance of having buildings insurance in place. I do not think the bank should be responsible for checking every single year that a customer has that policy in place; the customer has to share some of that responsibility. So, I think it is a good thing, done in the right way.

Chris Sullivan: I tend to agree with that. I feel it’s a shame that we ever got to a situation where banks should need to be legally obliged to do that. I think it should be absolutely part of the culture of the bank as a whole, and on that basis, we spent a lot of time over the last three years or so trying to change that culture, not just through rewards, but actually through training. All of my guys now have to be accredited professional bankers, and that professional standard could be very much brought into play. I sit on the professional standards board of the Chartered Institute and have done for the last year, and the whole aim around that would be to have some professional capability to be able to deal with miscreants in that way.

Q327 Chair: We have had some of that in submissions, too: you need a qualification to be a teacher or another similar profession, but for a lot of banking, you don’t; it is patchy, but there are some qualifications around. We asked one of the groups this afternoon, and two or three people had them, but two or three did not. Do you think that a greater formal professionalisation, like other professions-teaching, medicine, and so on-would be the right way to go?

Chris Sullivan: I do not only think it; I made a public statement over two years ago that all RBS relationship managers would be qualified. I went so far as to create a new curriculum, and I have had it signed off by the Chartered Institute and the Institute of Financial Services. If you want leadership from the top, I sit on the board of the IFS and on the Chartered Institute. I think it is a travesty that over the last 20 years-banks should rightfully stand up and be counted, and be criticised for losing sight of the customers. Part of that was because we stopped training people to be professional bankers, and perhaps started to train people to sell. I reversed that, specifically because I think it is hugely important that if you are going to give customers the best advice, you need to be able to understand everything that a bank can do to help those customers to achieve their ambitions. The other thing that I think it is important that they do is understand how businesses run, so all of my guys have to go and spend two days a year working for a small business. It is part of their contract.

Q328 Chair: Martin, a legal duty of care: what do you think?

Martin Dodd: I would agree with what Chris has said. The only point I would add is that one of things we have tried to do most recently is introduce codes of conduct, on the basis-

Q329 Chair: There are plenty of codes of conduct around banking. It does not lack codes of conduct. How do you ensure they are enforced?

Martin Dodd: I think the difference with these is the transparency in the way that we have launched them and the way that we have talked to our people about them. They are all built around our values, which are around putting the customer first, keeping things simple and making a difference together. They are about personal codes of conduct: what do you do as an individual within this organisation? Secondly, what is the business code of conduct? All throughout our organisation, we are coming to terms with understanding the role and job that we do.

In terms of professional qualifications and accreditation, it is very similar. I am responsible for complaint handling for Lloyds Banking Group, and one of the things we looked at is that there is no qualification. We are currently working through it. We built a qualification with the Chartered Banker Institute-a certificate in complaint handling-so that you know and you have got the confidence, as a customer, that when you are talking to one of our complaint handlers, they are qualified. At the moment, we have got just over 1,000 people who will be fully qualified in complaint handling by the end of this year, including all of my leadership team and myself. We are doing the same thing with our bank managers, in terms of doing a qualification with the Chartered Banker Institute. I think I would welcome more of it.

Q330 Chair: There is a curious paradox here. All afternoon, your staff have been telling us they put the customer first, they are not really focused on sales, they just want to look after the customer, they all have 90%-plus satisfaction rates and so on and so on. Yet the number of complaints about banking has been growing in recent years, as has the number of people going to the financial ombudsman. Your stock answer to inquiries like this is, "We used to have a problem, but in the last two or three years it’s all been changing for the better." Why is there a growing number of people complaining?

Martin Dodd: Let’s do the complaints. If you look at the day-to-day experience of our customers-I will talk for Lloyds Banking Group-the complaints are reducing. I could show you every six months-I am happy to submit the numbers-that our complaints have reduced. We have gone from a figure just shy of 200,000 complaints in a six-month period down to, in the latest set of figures, 96,000. We have seen a 42% reduction in our complaints around banking. What we have seen overall is an increase, and that is because of PPI. It is a historical product that we do not sell any more, but that is included in our overall complaint volumes. Our actual underlying trend-the experience our customers receive-is that we are seeing decreasing volumes of complaints, reported every six months.

Q331Chair: On complaints about insurance, excluding PPI-overall, not just with your bank-in 2008, there were 16,000. In 2012, there were 27,000. That is excluding PPI. It is not just about PPI; there are other sorts of complaint that are increasing too.

Martin Dodd: I know. We are not saying we are perfect. What I would say-I am happy to submit the figures-is that if you look at Lloyds Banking Group’s numbers, every six months we have reduced the number of complaints coming in to us.

Q332Chair: Chris?

Chris Sullivan: It is a similar situation. I am on a consistent downward trend in terms of corporate and SME banking. We haven’t got PPI. RBS as a whole has gone up because of PPI. NatWest has two consecutive half-years now of downward movement, excluding PPI. We are one of the lowest in terms of absolute numbers. It’s coming down. You would want a situation where you had relatively few, if none at all, but that is probably impractical given the millions of customers that we have got. But you would want to bring that down and see positive activity.

We have very strong combined activity around both retail and the SME arenas, looking at the types of complaints that we get. We do complete root cause analysis to try to stop it at source. There has been, and rightly so, a lot of complaints generated around the PPI arena. Until that washes its way through, I do not think you are going to see an overall trend downwards, but if you look underneath that, there is a big trend downwards, I think for all banks.

Q333Chair: Do you think there is a danger of complacency on the part of the banks if you put it all down to PPI?

Chris Sullivan: No, not at all. You can check complacency. If you saw no movement downwards at all in the other figures then I think you could absolutely say that. But if you look at the overall trend downwards-there will be blips. There will be new things that come along at different points. We obviously had our own issue around assistance. So our trend was heavily influenced by the time out in the NatWest brand in particular in the middle of the summer. So we saw a big spike of complaints followed by a big spike in FOS complaints because we could not deal with the levels in the time schedules agreed. Things like that will occur. They need to be one-offs and they need to be explicable but you do need to see us taking appropriate action for areas of proper complaint. You can see that.

Q334 Chair: Steve, I will bring you in on this and then I will bring my colleagues in.

Steve Cooper: The level of complaints is unacceptable for a service industry. In my view looking back, if I put PPI and things like swaps to one side, I do not see much evidence of mis-selling or inappropriateness of product. That is an historical issue that is being dealt with and rightly so. The banks got it wrong. In my view insufficient attention has been paid to the absolute number of complaints. I can only speak for Barclays here but I have listened to evidence here. From a Barclays point of view that is no longer the case. That is absolutely the number one priority for the management of the organisation.

I see complaints in broadly three categories. One would be policy. We are making some changes around that. In Barclays you cannot buy a packaged current account any more and staff are not incentivised to promote it. It is also around process, usually when a process has broken down. One I saw today related to a customer whose ATM card had been captured incorrectly and who had not got a new one quickly enough. That is a process. We learn from it. We put it right and we apologise. Some cases are, sadly, down to individual service. Again, we learn from that. We look at the individual. We put training in place, whether we need to put that on a broader stage or not. Like the other organisations here, it is on a strong downwards trajectory but there is much to learn. There still needs to be greater focus than there is today.

Chair: If it is on a strong downwards trajectory, it has simply not shown up in the figures to the financial ombudsman. Again-I quoted insurance excluding PPI-on banking and credit, the numbers are basically flat for the last five years. Five years ago there were 69,000. There are 64,000 now. That is not a strong downward trajectory. It is gently sloping down, fairly flat trajectory.

Q335 Mr Love: One of the things that we have been trying to figure out all afternoon is how the customer satisfaction scores that all the banks receive, which are regularly in the 80s and 90s, square with the level of complaints that we receive and the financial ombudsman receives. One of the areas that we have been focusing on is that there is this mismatch in knowledge and understanding of financial products. There are these sales incentives. What appears to happen is that you are ringing up customers, who probably think they are being sold a decent product but are not aware of all the ramifications. So if we take PPI, many customers did not know that they were being sold PPI when they bought the product. A lot of others were not aware that they were excluded from being able to claim against PPI. In your customer satisfaction surveys how much do you take into account whether the customer has been sold a product that is appropriate to them? Or do you just ask them, "You bought PPI. Are you happy? Yes. Fine." How do you take that into account because that could account for some of the discrepancy that exists here?

Steve Cooper: PPI-

Q336 Mr Love: I don’t want to focus on PPI.

Steve Cooper: Sure. I shall briefly give one example. Barclays stopped selling that some time ago. It was sold incorrectly in many cases. That is acknowledged. It is being dealt with. It is not acceptable. Lots of learns from that. Today two things happen. First, we use what we call a customer discussion document. That is a document that is worked through with a customer to understand what is important to them. That enables the personal banker or the cashier, the branch manager or the relationship manager of the SME business to work through with the customer what is important to them and what we can help provide them with to meet those needs. That is a permanent document. It is a legal record. A copy is given to the customer. It is also independently assessed to ensure that the understanding of that is correct with the customer and the person in the branch who is dealing with that. That is a living document that evolves with the customer relationship. In addition to that, there are a large number of random checks done by independent compliance people to ensure that those conversations are appropriate and that the customer fully understands what they have bought from the bank-or not as the case may be-and we take lots of readings from those samples and deal with the output from those as appropriate.

Q337 Mr Love: Chris, if you have a similar situation, tell me why PPI was not thrown up much sooner. If you evaluated the product that was being sold to a person, why did they not come across this mismatch?

Chris Sullivan: You cover a very wide area, Mr Love. There are some very strong misconceptions around. TheCityUK, which I sit on the board of, did a survey recently, which showed some interesting stuff. It asked people for their satisfaction score for their local bank, and that showed +51, and it then asked them what they thought of bankers, and it showed -61. That shows you that satisfaction surveys are very much linked to the questions you ask, which is your point. It also shows that generally people are saying that they are relatively satisfied with the local service that is being provided today by most, if not all, of the banks. I can only speak for my own bank, but I see other people’s scores and I talk to people who bank with other banks.

Of course there will be human misbehaviour. There always has been throughout my 38-year history, but it is not systemic or generated by the organisations themselves. It is hard to phone up the customer and say, "Did we sell you the appropriate product?", because if they bought it, they are likely to say yes. You have got to go to the compliance piece and first of all say, "We do not phone people up and sell them anything." As I said before, "sales" is not the right word for banks. We provide a set of services that should underpin the personal aspirations of our private customers or the business aspirations and ambitions of our business customers and there are ways in which you can do that, but it should be based on their needs and not what you want to sell. I think that that has changed a lot in the past three years or so.

I do not want to sit here thinking that it is all great now. We have to be careful to understand why it happened in the first place. In my view, banks lost sight of the customer. They started to care too much about their own short-term results, the bottom line and so on. There were various reasons why that occurred, but those things have now moved away. Longer term sustainability is much more important to people, having been through the situation of the past four years or so. The key issue is that you train people effectively, you focus them on adding value for the customer and reward them for that. What the customer tells you dictates what you do for the customers as a whole and you then apply a strong compliance folder over the top of that to ensure that you pick up the random misbehaviours.

Q338 Mr Love: Martin, let me ask you a slightly different question. Do you think that we can ultimately trust consumer satisfaction surveys carried out by the banks? If they are becoming aware that they might have mis-sold a product, to raise that question on their consumer satisfaction surveys would set hares running that might lead to significant compensation claims, so they are likely to veer away from that. Is there any truth to that?

Martin Dodd: Customer satisfaction surveys are one suite of measures that you should look at in the round. What do we look at? We look at our risk operation in terms of how customers have bought products from us. We also do customer satisfaction surveys, and we do it by product. If a customer buys a current account or a mortgage from us, we get a third party to independently review and look at the customer’s experience of that.

Q339 Mr Love: Let me ask you specifically whether-I did not want to get into this-if someone in a customer satisfaction survey rang up an old aged pensioner and they said, "I am an old aged pensioner", and they had bought PPI, would that customer satisfaction person say, "You were mis-sold; you need to reclaim"?

Martin Dodd: They would not do that because we do not sell PPI anymore, but what they would do is run through a standard script to elicit information from the customer to find out how the experience was for them and what type of product or services they bought from the bank. If anything untoward comes out from that, it is fed straight back into our risk and compliance department so they can investigate that and look into anything that has gone wrong. Yes, we specifically do do that.

From the third-party surveys, we look at what has happened across our complete range, and it is interesting when you see some of the verbatim comments from our customers telling you about the great service they received from their bank. When you actually look into it, it would be what you would describe as buying the products. It could be buying a mortgage; it could be purchasing a personal loan, because it is about what they needed from their financial services product for what they were doing. It could have been moving home; it could have been a new car; but in their words, that is a service. So it is about how we have helped that customer.

In addition to that, I would say that when I look at our complaints, a very small percentage-less than 5% of our complaints-is about mis-selling or the mis-sale of products. It is not a big issue for Lloyds Banking Group today in any way, shape or form. We do not see that in our day-to-day complaints. The majority of our complaints-as we talked about earlier-are where we made an error; where we said we would do something for a customer and we have not done it; or where the internal processes we built for the customer have let our customer down. We are not seeing in our complaint numbers a systemic issue around mis-selling. We now have the right, robust controls in place, so that if anything untoward was to happen, we could spot it. We have learned from our previous experiences and things that have happened in the past, like PPI. Today, we have something more robust in place.

Q340 Mr Love: Steve, the FSA has just concluded an investigation into inappropriate incentive schemes and some horrific tales have come forward; they have asked the industry to address that. Much of the evidence suggests that we ought to do away with all front-line sales-related incentives. How would you respond to that?

Steve Cooper: I think there is merit in incentivising an individual to do an even better job. I do not think anyone comes to work with the intention of doing a bad job, but good performances should be rewarded. If the customer says that this person has done a good job then they should have an extra reward for doing that. There are all sorts of studies of all sorts of instances where that kind of thing does not happen, and that can lead to poor performance.

Q341 Mr Love: We investigated earlier on with some of the previous witnesses the basis on which they were appraised for their annual increment-or bonus or whatever it might be-and that was a fairly sophisticated process. Can you reassure us from what you just said that, in the future, there will be no basis for sales-related bonuses under any guise in your organisation?

Steve Cooper: There is not one at Barclays. I agree with you. I have been back in the UK for Barclays for six or seven years and it has been very complicated how some people have been rewarded, with end-of-year performance reviews and so forth. We have simplified all of that. For our people, 90% of their compensation is base salary and they can earn somewhere between 10% and 12% of pay as an incentive based purely on customer satisfaction. That is independently measured and verified. We have no intention of going into anything to do with sales targets or financial rewards for selling certain products-particularly certain products versus other products. I think that is what got the industry into trouble; things like PPI are a disaster for our industry. There is no way we want to go back into that space; it is a disaster financially and a disaster for our reputations. We want to go to the other extreme.

Q342 Mr Love: If I may say so, there is quite a lot of evidence to suggest that interest rate hedging products for small businesses may be the next scandal to emerge. We will wait to see whether that happens. May I just ask the other two, finally, about putting customer satisfaction at the core of what you do? You are clearly discussing what your future incentive schemes for staff will be; how much will they be based purely on customer satisfaction?

Chris Sullivan: I answered the question at the very start to Mr McFadden-the answer to your question is categorically yes. Purely on customer satisfaction? I think that that is dangerous. To incentivise anybody on one single measure allows it to be abused, so there needs to be a balance. Let me give you a ridiculous example: if everybody who came in to talk to us wanted a loan, and we said yes to everybody, they would all be satisfied. We would then be accused of being irresponsible. So I need to have some risk elements in play, not least because my regulator expects me to do that, but it is also a prudent business thing to do. Actually selling people products? No, we are not incentivising people to do that, and we will not do that. That is not a balanced thing to do.

In terms of interest rate derivatives, they are something that I know an awful lot about-I am leading that particular investigation-and, categorically, I have not found any evidence whatever of deliberate mis-selling of that product. I do not believe that that is the next scandal, certainly as far as RBS is concerned.

Q343 John Thurso: We had a very interesting session first off, and I asked the people in front of us how they fitted into their organisation, and what all the different structures were. That was quite useful factual information. Would any or all of you be prepared to give us that in an organisation chart?

Martin Dodd: Yes.

Chris Sullivan: Yes.

Steve Cooper: Yes.

Q344 John Thurso: It is possible to see a job description for each of those? If we could see that, it would be really helpful.

Martin Dodd: Yes.

Chris Sullivan: Yes.

Steve Cooper: Yes.

Q345 John Thurso: That saves me about 15 minutes of questioning straight off. The next thing I wanted to ask was about the pricing of loans to SMEs. Each of your institutions was represented earlier, and there was almost complete agreement that around 3% to 4% above base was a fair price in today’s market. Is that something you would all agree with?

Chris Sullivan: I think it’s an average price.

John Thurso: Obviously there a 101 variables, but for a reasonable company with a good proposition, and so on, that seemed to be the average.

Steve Cooper: Ballpark, yes.

Chris Sullivan: As an average, that is absolutely right, and obviously the rate should relate to the risks involved in the transaction.

Q346 John Thurso: In making up that price, presumably there is your funding cost, your operational cost, your risk-assessed cost, and then your cost of capital?

Chris Sullivan: Yes.

Q347 John Thurso: Broadly speaking, on the cost of capital side you would be looking for a return on equity of around 15% to 20%-it would come to about that, pre-tax?

Chris Sullivan: The lower end of that range.

Q348 John Thurso: Around 15%. So if somebody is looking for a return on equity of 15%, that will roughly translate to about 4% above base for a business. I know that every single one of those varies-the number of basis points for operation or for risk can be changed-but the reason I ask is that there is a tremendous tendency to think in terms of your equity cost, the cost of capital, being the reason you put out a loan. So, I want to be absolutely sure that the elements I have identified, and the broad way it is made up, is a fair representation of how you set out to price your product.

Steve Cooper: I think, Mr Thurso, that there are a couple of things I would add to that. One is cost of liquidity-that is a significant element, in addition to cost of capital-plus, of course, loss rate: the cost of the impairment. I think it is probably inappropriate for me to be very specific commercially, but, certainly in terms of smaller SME lending, I would be very surprised if there is a return on equity in the 15% to 20% range. I think that it is materially lower than that.

Chris Sullivan: I think we were talking averages across the whole industry. Obviously, the other issue now relates to the capital that you need to employ in the business, which is substantially more than it was in past eras.

Q349 John Thurso: If we broadly operate around, let us say, base plus four as being a reasonable price in today’s market, how are the decisions made within the organisation as to how that becomes, say, 8% for an SME, or more? Who makes that decision in that organisation?

Chris Sullivan: We have a centrally applied matrix, which gives people a range-so there is a lower end and a higher end of the range-and I get a report every month to see whether there is anything that is an outlier in that respect. I don’t want to be doing anything that is at the higher level, even at the range you just suggested; it suggests that we are taking excess risk for the reward involved.

Q350 John Thurso: Can I specifically address this to you, Martin? I have a case where the cost for the finance from what is now part of Lloyds Banking Group-I know it is Bank of Scotland-was happily quoted at 8%. The customer shrieked, and it dropped to 5%. I want to know how that first decision was made-that 8% should be offered-and how, after the shriek, it could go down to 5%. Obviously, they were both base plus.

Martin Dodd: It is difficult for me to comment on specifics without knowing the case, but I am very happy to look at it afterwards, if you would like me to. We operate a very similar scheme, where we effectively have a matrix that people look at, but one of the things we are very keen on is lending discretion right at the front line. The relationship managers can effectively lend up to half a million pounds. The empowerment is with them, because they have the relationship with the customer-they know the customer’s business.

Q351 John Thurso: I am going to be pedantic, for which I apologise. I have tried to go through real cases, not apocryphal ones when a friend knows somebody who knows somebody. This one I can attest to, because I have the facts. The relationship manager didn’t know about the increase. It had come direct from head office. It seemed to be a circular: "We are delighted to renew your overdraft, and it is now this price." The relationship manager achieved the decrease, apologising all the time that it had happened. What I want to know is: how come a relationship manager doesn’t actually know that his client’s overdraft is going up by three and a half points, and then can get it down by three with a squeak?

Martin Dodd: My short summary is that that should not happen. The relationship manager should be the one having the conversation with the customer upon renewal of the overdraft facility.

Q352 John Thurso: What I am wondering about-this comes back to the central thrust-is whether, at the very senior level at the bank and down through some more senior levels, there is an absolutely correct intention to get it right, but somehow, when you get right to the very end, you find some customers who have had these kind of experiences. The worry for us is whether this is just the odd accident, which can happen, and the customer has the intelligence to squeak and it gets put right, or is it actually that somebody somewhere has just decided that all these renewals will go out at 8% this week or whatever, and everybody is being taken by surprise. In other words, is it structured or not?

Martin Dodd: Again, I do not have the details, but I will give you my opinion. I believe that this would be a one-off, and the reason why is that if we had written to all our customers centrally with a base plus of eight, we would notice the complaints rocket. With our intelligence and how we track our customer interactions, if we saw that sort of thing, we would pick up on it straight away. We would know that there was an error, and we could fix it at source.

Q353 John Thurso: Can I come to you, Chris? You very kindly offered to give me quite a lot more data than we have time for here, for which I thank you and I look forward to receiving. One of the things that came out earlier was that your team talked about the property caveat-in other words, you want to lend, but not for property. Given the amount that commercial property is used to underpin lending in the UK-it is a very traditional asset to back lending-to what extent is that actually depressing lending across many other sectors?

Chris Sullivan: They are two different things. When we talk about commercial property lending, that is actually lending that has been provided to buy that particular property or investment. If you want my personal opinion, as someone who came back into business and corporate banking after running the insurance businesses for a while, I built Lombard off the back of some pretty basic principles of knowing your customer, value for money and things along those lines. I suddenly find now that I have a whole bunch of customers who have property-related transactions that have nothing to do with their businesses. Basically, the market just frenzied on property transactions as an extra bonus for people. People thought that it was a no-lose investment. If you look at the amount of commercial lending that was done in 2007 relating to property-related transactions, it was untold numbers approaching 70% of the whole thing. We have our fair share of that and we want some of that to go away, because we think it imprudent to have done that and we have to do that sensitively over a period of time. We have a very stated ambition to reduce the amount of property lending that we have. That has nothing to do with the security that we take for normal trading facilities and things along those lines.

Q354 John Thurso: If a company happened to have a very strong balance sheet, because it had quite a lot of property that was owned within the company, but was actually doing other things, that is not going to-

Chris Sullivan: No, the evidence is that all that kind of lending is actually going up.

Q355 John Thurso: All of your representative teams told us that there was no limit to the amount that they could lend-although, obviously, we were talking about SMEs, so it was mostly up to £25 million-or no cap in terms of either sectors or regions. My understanding is that some of you have indeed allocated lending moneys to different regions to ensure that it does not all end up in the south-east and London, which could be a very useful and correct thing to do. How do I marry up the fact that there does appear to be some allocation of funds with the fact that the regional guys feel that there is no allocation?

Chris Sullivan: I was the one who took the funding for lending scheme, took £2.5 billion, split it into 10 pots and gave it to each particular region.

Q356 John Thurso: That was just the funding for lending scheme.

Chris Sullivan: Yes, that is the particular tranche of attractive funding that I wanted to get out to the whole population. I didn’t want it to be completely subsumed into, let us say, the south-east. I felt that it was a really good thing for our guys to go out and talk to customers about, so I split it into those 10 groups.

The other thing that you said is quite correct. There is no cap. Actually, if there were one thing that I would have liked to have done more of in the last three years, it is to have lent money to viable companies. If you can find some for me, I will be very grateful. This is a serious comment: it is the one area where I need my business to improve.

Q357 John Thurso: Let me put this to all of you-feel free to jump in. Everybody wants more business activity, but lending is seen as a critical part of more business activity. All the banks tell us that they have money ready, willing and able to go out, yet none of us is getting to where we want to be, which is you lending the money, and businesses borrowing and growing activity. What is the element in the equation that we are all missing?

Chris Sullivan: Confidence. Business confidence. I go out and see at least 250 customers a month across the whole spectrum-a small number of big ones, and a larger number of small ones. I shall give you some statistics, and I am sure that my colleagues have their own. My deposit accounts are at record high levels and have been for two years. There is a lot of liquidity sitting in SMEs that they are actually lending to us. My liquidity has improved fantastically well during that period.

The other issue is that the overdrafts I have out there already are less than half utilised-£30 billion of available funds is not being used by businesses right now. I asked them why, because I would like them to use more. It is allocated already, so I already have capital allocated against it. They say to me that cash is king in a difficult environment and that they want to conserve cash. In particular, if I go back to about April or May of last year, the eurozone crisis really crushed confidence in the UK. People were just scared of what was going to happen. It has taken a long time for that to resolve itself. I feel that some green shoots are starting to happen again, but only very recently, and we shall have to see stability for quite a while yet before those businesses feel that the risks of investing in their business are enough to allow them to release some of the liquidity they have already and ask us for more.

Steve Cooper: I add to what Chris said. I totally believe that confidence is at record levels of not being there. I am seeing record levels of deposits across SMEs, similar to that of Chris. Actually, that does not really help for liquidity purposes. If they keep it on deposit overnight, that does not help to structure the balance sheet for lending. There are huge amounts of headroom within borrowing facilities, so the limits are broadly stable, but the amount of usage is going down as cash deposits go up.

What I am seeing of late is interesting. The business community is now starting to want to put that deposit on a term period. The upside is that they fear the economy less, so they feel that more stability is going forward. The downside is that they are not seeing opportunities for growth. That is what we need to happen. We launched an initiative last week, "Business Abroad". Interestingly, those SMEs that start to trade cross border see disproportionate levels of growth and profitability compared with those that do not. The real disappointment is that only one in five SMEs even thinks about exporting. There are loads of opportunities out there. The British brand is strong. To me, there is more around creating confidence in those areas.

The other area that I add to confidence is the gap. Our job is to provide debt that is repayable from future cash flow. We should not be providers of equity. There were providers of equity in the market. They disappeared when the crash happened. They haven’t come back in.

Q358 John Thurso: That is a different argument, because the complete absence of equity in our mix goes back 15 years or more, and we disguised it with the great plenty up until 2000. We were not delivering.

Chris Sullivan: Correct.

Steve Cooper: That is what is creating quite a bit of the annoyance with those who are saying that they cannot get access to finance. It is equity that they cannot access any more, which historically they would have had through debt.

John Thurso: I think that I am getting the glad eye from the Chairman, so I had better stop.

Chair: We are about to have a vote in House, so this might be a natural end for all of us this afternoon. I thank you, and please pass on our thanks to your colleagues for giving us evidence this afternoon.