Banking Standards - Minutes of EvidenceHC 860

HOUSE OF COMMONS

HOUSE OF LORDS

ORAL EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKING STANDARDS

SUB-COMMITTEE J

PANEL ON CROSS-SELLING AND MIS-SELLING

MONDAY 21 JANUARY 2013

PHIL LONEY, CAROL SERGEANT CBE and HELEN WEIR

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Parliamentary Commission on Banking Standards

Sub-Committee J-Panel on cross-selling and mis-selling

on Monday 21 January 2013

Members present:

Lord McFall of Alcluith (Chair)

Mark Garnier

Mr Andrew Love

Mr Pat McFadden

Lord Turnbull

Counsel: Rory Phillips QC

Examination of Witnesses

Witnesses: Phil Loney, Product Head for General Insurance, Lloyds Banking Group, 2003-10, Carol Sergeant CBE, CRO, Lloyds Banking Group, 2004-10, and Helen Weir, Principal Retail Distribution, 2008-11 and CFO, 2004-08, Lloyds Banking Group, examined.

Chair: Good morning. Welcome to the Panel on Cross-selling and Mis-selling, which is part of the Parliamentary Commission on Banking Standards. Our QC, Rory Phillips, is with us this morning, and I ask him to begin the questions.

Q480 Rory Phillips: Good morning. Just by way of introduction, and so that it is on the record, this is, as the Chairman said, part of the work on PPI that the panel is doing. Today, we are focusing on the Lloyds Banking Group, not only the biggest retail bank, but the leading seller of PPI, on the basis of the figures that the Commission has something over £4 billion has been paid to customers in compensation, with total provisions for future payments taking the total figure to about £6 billion. The purpose of today’s session is to establish, if we can, what went wrong, and how a repeat can be prevented, all the time, of course, bearing in mind the Commission’s own terms of reference and the importance of culture and standards.

First, may I establish the framework with you? I will try to direct my questions to individuals, but obviously feel free to chip in as we go. We know now that since 2008-09, the Lloyds group includes HBOS. So far as you are all concerned, however, you were, as I understand it, originally TSB people, and you then came to hold positions within the wider group. Is that correct in each case?

All Witnesses: Yes, Lloyds TSB.

Q481 Rory Phillips: Thank you very much.

So far as that is concerned, today, we will be focusing on the Lloyds TSB part of the PPI problem. I appreciate that there is a completely separate HBOS problem, but it’s right, isn’t it, that the problem in terms of numbers now, for the Lloyds TSB part is a much greater problem?

Helen Weir: Lloyds TSB, as you rightly say, has a larger loan book. Lloyds was the leader in the market.

Q482 Rory Phillips: Yes, but in terms of charges for PPI specifically, for example, in 2011 HBOS charged £1.1 billion whereas by comparison Lloyds TSB charged £2.45 billion, so we can see that the TSB problem is of a completely different order. That’s right, isn’t it?

Phil Loney: Yes, that would be in proportion to the market share in personal lending. That would be right.

Q483 Rory Phillips: Can we just go through some biography very quickly, so that it is on the record. Ms Weir, you joined Lloyds from Kingfisher as group finance director, where your responsibilities included managing the financial affairs of the group, and reporting on financial issues to the chief executive and the board. Is that correct?

Helen Weir: That is correct, yes.

Q484 Rory Phillips: In that role, and indeed when you became group executive director of UK retail banking in 2008, you were a member of the group executive committee, and of the board. Is that right?

Helen Weir: That is equally correct.

Q485 Rory Phillips: In your retail role, I think you were ultimately accountable, weren’t you, for PPI sales process in the retail bank?

Helen Weir: It is correct that the retail bank operations were part of my responsibility.

Q486 Rory Phillips: That accountability was reflected, wasn’t it, in the reduction by some 25% of your bonus for 2010, which was announced by the group in February 2012, following the increased provisions for PPI?

Helen Weir: I believe that in that announcement, the board made it clear that what they were doing was reflecting the accountability of the executive directors of the board in those bonus reductions.

Q487 Rory Phillips: The position simply being that had they known, they would have had to make such a huge further provision for PPI, the bonus figures would have been different. Is that right?

Helen Weir: I believe so.

Q488 Rory Phillips: You left the bank in, I think, March 2011 and took up your current position as group finance director of John Lewis in June 2012. Is that right?

Helen Weir: That is correct.

Q489Rory Phillips: Ms Sergeant, you held senior positions in the Bank of England and then moved to the FSA, where you held very senior positions, ending as an executive director and member of the board, accountable for authorisation, enforcement, risk policy, research and strategy. Is that right?

Carol Sergeant: Correct.

Q490 Rory Phillips: In 2003, you went to Lloyds as chief risk officer, first of Lloyds TSB and then of the banking group. Is that correct?

Carol Sergeant: No, I joined Lloyds TSB in 2004, and I left the FSA in 2003. As is usual when you leave the public sector, there was a period of gardening leave.

Q491Rory Phillips: Thank you. In the roles you had at Lloyds, you were responsible, I believe, for risk, competition and public affairs. Did you also have a responsibility for compliance?

Carol Sergeant: Compliance and customer treatment in particular was considered one of our key risks.

Q492 Rory Phillips: You joined the board, I believe, in 2008. Is that right?

Carol Sergeant: I was never a board member of Lloyds TSB or Lloyds Banking Group.

Q493 Rory Phillips: Thank you. You left with effect from January 2011, by going on to lead a project for the Treasury on the development of simple financial products. Is that right?

Carol Sergeant: Among other things. That project started roughly a year after I left.

Q494 Rory Phillips: Did you face some reduction in your bonus for 2010 in the same way as Ms Weir?

Carol Sergeant: As a member of the group executive committee, and for the same reason-that the board took the view that the most senior people should take a reduction in their bonus because the board had not anticipated the judicial review outcome-yes.

Q495 Rory Phillips: It was a question of accountability, as the statement said.

Carol Sergeant: Yes.

Q496 Rory Phillips: Mr Loney, you joined Lloyds as long ago as 1986, worked your way up in the insurance division and left in 1995. Is that right?

Phil Loney: Yes, that is correct.

Q497 Rory Phillips: You held some senior positions in other financial services companies, before coming back to Lloyds in 2003. Is that right?

Phil Loney: Yes, that is right-October 2003.

Q498 Rory Phillips: As the managing director of Lloyds TSB General Insurance?

Phil Loney: Yes.

Q499 Rory Phillips: You became the managing director of the group general insurance business in 2009 and then the managing director of the group’s life, pensions and investments business in February 2010.

Phil Loney: Correct.

Q500 Rory Phillips: You left the group in 2011. You are now group chief executive of the Royal London Group.

Phil Loney: Yes, that is correct.

Q501 Rory Phillips: In terms of the PPI product, is this right: during your time you were accountable for the development of its features and benefits, as well as for the administration and claims service?

Phil Loney: Yes, both of those are correct, although it is important to point out that quite a lot of the insurance claims were actually in the books of a separate life insurance company-Prudential-which provided that element of the cover. But we did all the claims handling, irrespective of which aspect of cover was concerned.

Q502 Rory Phillips: In the list of key decision makers which has been provided to the Commission by the group, your role is described as the product head so far as PPI is concerned. Is that fair?

Phil Loney: Yes. I have been responsible for the development of the product and for the delivery of the claims service, so I think that is accurate.

Q503 Rory Phillips: As you know, the group has produced a written submission to the Commission, but as we have now established, none of you is currently employed by the group, so can I just check whether you saw the submission in draft before it was sent to the Commission?

All Witnesses: No.

Q504 Rory Phillips: Have you since read it?

All Witnesses: Yes.

Q505 Rory Phillips: Do you have a copy of it today?

All Witnesses: Yes.

Q506 Rory Phillips: Can you look with me at the second paragraph on the very first page? You will see in the second sentence that the response-this document-"focuses primarily on the single premium PPI product that was sold face to face in Lloyds TSB…branches to customers taking out…unsecured personal loans for the period 2005-2010". You will see, therefore, that there are in fact five limitations on the scope of the submission indicated in that single sentence. The most obvious is at the end: the submission focuses on the period 2005 to 2010. You all joined the group before that, in 2003 or 2004? Is that right?

All Witnesses: Yes.

Q507 Rory Phillips: Now, so far as the selling of the product is concerned, the submission suggests that is was being sold by Lloyds TSB from the late 1980s or early 1990s. Can we take it at least that by the time you joined, or in your case, Mr Loney, rejoined, the business, this was an established product, generating a substantial amount of income?

Phil Loney: Yes, you can.

Helen Weir: Yes.

Carol Sergeant: Yes, it was a product that had been around for a very long time.

Q508 Rory Phillips: In fact, in the period up to 2000, the sales figures seem to have grown and grown. Do you have the annexe to the submission, which, in my copy, is virtually illegible because the print is so small. There may be spare copies on the end of the table. Could you please find it, if you have not found it already? I hope your copies are better than mine. At the top left, it says "Lloyds Banking Group", and the first box says, "Total PPI Policies Sold by Type (for all brands/banking entities in thousands of policies)". Do you have it? We can see that, so far as sales figures-in terms of numbers of policies-are concerned, the group was selling over 1 million PPI policies in the first year covered by the table, 2000. That is right, isn’t it-1.192 million, I think?

Phil Loney: I think there is some clarification needed of what the product content is. I am not sure, but I can give you my supposition on it-I have not managed to get an answer on this from Lloyds. You will notice that it says, "Total PPI policies Sold…for all brands", and is headed up "Lloyds Banking Group". I therefore wonder whether this is an amalgamation of Lloyds TSB and HBOS sales levels over the period, rather than just Lloyds TSB.

Q509 Rory Phillips: If it is, it would be a retrospective one, would it not? Because of course HBOS did not become part of the group, did it, until I think 2008?

Phil Loney: No, that is absolutely true.

Q510 Rory Phillips: Can we just for the moment put that clarification to one side and look, please, at the overall total line at the bottom of the page? We see, do we not, that there is an increase in 2001 to nearly 2 million policies sold, in 2002 1.8 million and then an astonishing increase to 3 million, with an almost equally astonishing decrease the next year to 1.7 million, and from then on a decline until the last year for which there are any figures-under 300,000-in 2010? That, on any basis, is a huge number of policies. Can we now look, please-perhaps, Ms Weir, I can address these questions to you-at the issue of why Lloyds developed this product so strongly during your time in office? It was still selling well over 1 million until the end of 2008. And what were the drivers for that? First, I suggest is profitability. The PPI premium income was bringing in literally hundreds of millions of pounds of income for the group, was it not?

Helen Weir: Yes, it was.

Q511 Rory Phillips: We can see the tables on page 11 of the submission, which only give a snapshot of a part of the relevant period. Interestingly, it includes several years that were not the focus of the written submission put in by the group. You can see there, if you look at the top table, "Total Group PPI income (net of claims)", so that is the net position after claims have been taken into account. The first figure, for 2002, is £670 million; then the next year £651 million; up to £693 million for 2004; £683 million for 2005; and £637 million for the final year on the table, 2006. At the bottom of this page, you will see that the profit before income and tax, in terms of the contribution of PPI, was estimated at 14%, so it was a hugely profitable business for the group, was it not?

Helen Weir: PPI in and of itself, in isolation, as you rightly say, delivered significant profits. I think, though, it is first of all important to reflect the context. You asked why or what was the context in which the product was developed. Clearly, I only took over responsibility for the retail bank in 2008 and, obviously, I was finance director from 2004, so I therefore have difficulty commenting on the period prior to that. What I do know is that during the period of my tenure, a lot of work was done in terms of understanding customer needs-what customers were looking for. Certainly, when I was in the retail bank, I used to spend probably at least a day, if not two days, a month either out in branches or listening in to calls, whether those were customers calling in to our telephony centres or customers who were in financial difficulties and who were calling our helpline. What I am very clear about, both from understanding the research that was done, which Phil can probably talk about in more detail, and from the time that I spent listening to what customers were asking for, is that this was a product that met very important financial needs for customers who wanted peace of mind were they to fall into financial difficulties. That is the first point I want to make.

My second point that I would like to make is that within the bank, throughout the whole of my tenure there, this was not a product where we looked at the individual profitability of PPI; that was just not the way that we looked at it. PPI was never a product that was sold in isolation; it was always sold in conjunction with a loan. Customers were asked whether they wanted to take out PPI in conjunction with a loan product. Again, to the best of my recollection, and I probably had greater visibility of this when I was in the retail bank, the profitability of the unsecured lending business was highly marginal if not negative-and it was negative for a number of years-and that included any profits from PPI. And we were no different, I believe, from any other bank in the sector. The dynamic of the unsecured lending business was effectively that you had a loan product that was marginally profitable or unprofitable, with contribution coming through from the PPI products, so there was, effectively, a cross-subsidy. As I say, that was not something that was unique to Lloyds, but was a dynamic that was in the industry, and, although I do not know prior to 2004, my understanding is that it had been in place for some long period of time.

Q512 Rory Phillips: Can I just pick that up? We will come back to this whole issue of cross-subsidisation in a moment. Is not the position simply this-for Lloyds and the other banks-that, as you have been saying, the unsecured lending market was, frankly, unprofitable, it was so competitive and the rates were so low, and what made it possible in this case were the add-ons, and particularly PPI? They turned an unprofitable business into something that, as we have seen, is bringing in substantial income and was indeed profitable. Is that a fair way of putting it?

Helen Weir: There was absolutely a cross-subsidy between the two products. The profitability of PPI varied quite a bit of the time. Certainly, by the time I came into the retail bank, the profit levels were not as high as the ones here. But, yes, absolutely. There was an industry structure whereby the profitability of the PPI product, which was always sold alongside the unsecured lending-this was not a stand-alone product-cross-subsidised.

Q513 Rory Phillips: Can I just pick you up on the question of profitability? We have been given only a very limited amount of information about profitability at this stage, so the entries for the tables on profitability are mostly blank. Explanations have been given, but can I ask you to look at the bottom of page 11 of the written submission and pick up the point you have just made about the varying profitability? Here you see, for a period when you were at the bank, "Total net PPI income as a percentage of LTSB Group’s overall profit before income and tax was on average around 14% from 2003 to 2006." Does that not fit with your recollection of the rough position?

Helen Weir: As I say, it was not a measure that we looked at during that period or subsequently. What we would look at was the profitability of the overall unsecured lending category, so I could not confirm that number as something that was salient because it was just not the way that we would do business.

Phil Loney: Just to help there, this set of figures that you have on page 11 is an extract from Lloyds’ submission to the Competition Commission, because the Competition Commission specifically asked to understand the contribution from PPI-

Q514 Rory Phillips: Just to be clear for the transcript, that submission was put in in 2008-09?

Phil Loney: In 2007, I think. The Competition Commission asked for a number of different views of the figures. This was something we had to put together from our audited accounts, because we did not look at profitability in this way, so it was put together specifically for the Competition Commission. As Helen says, we looked at it on a category basis with the lending and the PPI income going together.

Q515 Rory Phillips: But in terms of the premium income, which is a rather different question, and the question to which the table at the top of the page is addressed, that presumably was something you were monitoring, as a responsible head of product, at all times. You must have been.

Phil Loney: Yes, and in fact this does not show the gross written premium-that is, the premium income that customer showed.1 Both of the tables are based on the income that was received after the life insurer had subtracted their claims, which were the vast majority of the claims, from that gross written premium. Don’t confuse these numbers across the top of 554, 480, etc, as the gross written premiums paid by customers. They were actually slightly larger than that, and what happened was that most of the premium went to the life insurer, which was Prudential for most of the period we are talking about here. The claims bill for life insurance and critical illness would be paid from Prudential’s books. The short-term disability claims-the £30 million you have here-came from the Lloyds TSB company, which was the general insurance company that I ran; and the income line is the income that came back in from the life insurer net of the life insurance, critical illness and long-term disability claims being paid.

Q516 Rory Phillips: Understood. Now what we do not have-as you will see, the table ends at 2006-are any figures for the bottom line: total group PPI income-the net of claims figure I read out-for 2007, 2008, 2009 or indeed 2010. Are any of you able to assist with that? Mr Loney.

Phil Loney: I am afraid I don’t have those figures.

Q517 Rory Phillips: A rough guess.

Phil Loney: All I can say is that it would have been going down in terms of direction, but I would not want to mislead the Committee. I don’t have that information.

Q518 Rory Phillips: Yes. We have to be a bit careful about going down because presumably that is based, is it not, on a decline in the number of policies sold, remembering the table we looked at a little earlier?

Phil Loney: There would have been couple of influences, so there would be some decline in the number of policies sold. That is absolutely right. The other thing is that post the credit crunch, there will have been an increase in unemployment claims, so the claims ratio was going up, and the claims ratio on the loan protection product around this time, when you took all the claims into account, including life insurance claims, was about 20%. I notice the latest figures from Lloyds, although there is not much of a time series there, are showing about 32% at the moment.

Helen Weir: There would be a couple of other points to mention in that time. The Lloyds submission said that we stopped selling single premium in 2010. That is actually incorrect. We ceased selling single premium at the beginning of 2009. It was a decision I took soon after taking on my new role in conjunction with the general insurance business. Clearly, the regular premium product, which we sold after that point, is a much less profitable product, so you would see, were you to look at the numbers-I am afraid I do not have them-a significant decline in profitability going from 2008 to 2009.

Q519 Rory Phillips: That is very helpful, and that is why I asked at the beginning whether there were any parts of the written submission you wanted to correct.2 That is extremely helpful. Can you look back at the table with figures of products sold, so that again this is clarified on the transcript? If you remember, it covers the period from 2000 down to 2010. Can we take it therefore that the entirety of the figure for 2009 is made up of regular?

Helen Weir: With the exception of the very small number-

Q520 Rory Phillips: It is 16.

Helen Weir: Yes, which would be a legacy. We changed over right at the beginning of 2009. I took the decision in the summer of 2008, shortly after taking on the retail role, to make that change from a single premium to a regular premium product.

Q521 Rory Phillips: We will come back to this when we look at the history at that point, but can I ask you now, as you have raised this issue, why did you decide to stop selling the single premium?

Helen Weir: It was to do with the context at the time. I am sure we will come back to this, but clearly all the way through the period that we are looking at here, there were a number of phases, from the point of view of the PPI market and the conversations that we were constantly having with our regulators around the product. 2005 obviously saw the introduction of ICOB and an ongoing dialogue between the industry and the regulator to ensure that the product was being sold most effectively, that the product design was good and that the sales processes were good. That was succeeded in 2007-08 by ICOBS, which came into being, I believe, actually in July 2008. Again, throughout this period, there was ongoing discussion, debate and dialogue between the industry and the regulators to try to make sure that we were selling a product that fully met customers’ needs and selling it in a way that they could understand.

The reasoning behind the decision to move was an issue that was flagged first, probably, by the FOS in the latter part of 2007 and then came through in commentary from the FSA in early 2008, which related to flexibility, as they termed it, and the possibility that a customer would cancel a loan during the loan period. They referred to this under the principles.

What I would say is that at all times, as a bank, we were very concerned to ensure that we sold consistent both with the rules that were in place through ICOB and ICOBS and with the principles that the FSA established for sales. For the first time during this period, this issue about flexibility began to be raised. We were concerned that, potentially, a customer could take out a loan and then cancel some way through, in a way that had not been discussed at the time of the sale. We therefore, and I took the view from a retail bank point of view, that the single premium product might not be an appropriate product for a customer in those circumstances and therefore made the move to regular premium.

The other important factor was that the regular premium, because customers paid on a monthly basis, had a higher degree of visibility for customers. They could absolutely see it each month in their payment. It was a separate premium from the loan or a separate payment from the loan payment.

Phil Loney: Which was a theme that was coming out of the Competition Commission at the time-the customer being able to see that this was an optional purchase. We were quite happy that, as part of the purchase process, we were making it clear that it was optional, but we thought it reinforced the optionality of it to have a separate direct debit and a separate payment schedule from the loan.

Helen Weir: I would say there was some debate at the time, because the countervailing view was that, potentially, a customer would choose to cancel the product at the very point where they most needed it and that that could be more likely with the regular premium product, but ultimately we took the view that this was the right thing to do.

Carol Sergeant: It is worth adding, though, that even with a single premium product, if and when a customer did cancel the product, they got a very good rebate of the premium. I am not so good at the detail, but Phil could probably explain that further, because that was important. We went well ahead of the rest of the market and the regulatory requirements in terms of how we calibrated that repayment for early termination of the single premium product.

Phil Loney: Yes, that is a very important point. While we talk about Lloyds having a PPI product range much earlier than any of us joined the organisation, we did fundamentally revisit the loan protection insurance product in 2004 and launched a new version of that product. Many things about that product were different from the rest of the marketplace. The rebate terms, in particular, for mid-term cancellers were particularly different. We looked at the common market practice. Some products in the market did not have any rebate at all, which the FSA picked up in its first thematic review. We were never in that position.

A number of people were using something called the rule of 78, which is taken from the lending industry and is a way of ascribing interest over the course of a loan in order to calculate rebates. As insurance people, we knew that the correct approach to rebates was to base it on the pattern of claims over the period of the policy. Generally, what you found with our PPI products was that the further into the term of the policy the customer was, the higher the level of claims. That meant that somebody who cancelled their policy early should, for it to be fair, get a higher than pro rata rebate, and somebody who cancelled their policy late in the term should get a lower than pro rata rebate. That perception of fairness was the basis of the rebate table that we introduced in 2004.

Q522 Rory Phillips: Thank you. I will just come back to the starting point of those answers, which was you saying that you took the decision at the beginning of 2009 to stop selling simple premium policies. It is right, isn’t it-we will come back to this in detail in a moment-that the FSA asked firms to stop selling single premium PPI in December 2008?

Helen Weir: The decision was taken in the summer of 2008.

Q523 Rory Phillips: Is the answer to my question yes?

Helen Weir: The answer is yes, but I can give some context. We took the decision in the summer of 2008-probably about July. At the time that I said that was what we would do, I was told that it would take 14 months to change our systems. I said, "No, we will do it on 1 January 2009." We subsequently informed the FSA of our decision, and they communicated back to us that they were extremely pleased that we had made that call. They subsequently, as I understand it, requested all firms to make such a change in that sort of time frame. When HBOS became part of Lloyds Banking Group, we learned of some of the challenges that they had faced. But our decision was not made in response to a request from the FSA. We took a unilateral decision-the board minutes will bear this out-ahead of any request from the FSA.

Q524 Rory Phillips: By then there had been three FSA thematic reviews, and, as you have already pointed out, ICOB was replaced by ICOBS in 2007-08. Was it at least in part a response to increasing pressure on you and on this product from the regulator?

Helen Weir: As I think I mentioned earlier, this issue of flexibility had come out, first, with the change in the FOS uphold rate. Up until about 2007, our decisions were being upheld for the vast majority-I think it was about 80%-of our PPI cases that went to the FOS. Subsequently we saw that change quite significantly, and we sought to understand why that might be. One of the issues was about flexibility-as the FOS termed it, the prospect that a customer might change their mind about the length of the term of the loan, or that they might cancel the loan during the term. That was not something we had explicitly built into our sales processes at that point. We recognised this issue from the FOS’s view. The FSA also raised it in, I think, their third thematic review or the subsequent report they did on the mystery shops. I think that it was in response to the third thematic review. It was in response to the issue being raised that we reconsidered and felt that we could improve what we were doing. That was the primary motivator behind the move to regular premium.

Q525 Rory Phillips: As I say, we will come back to this issue. Can I take us back to the original topic, which is about profitability? We looked earlier at the huge decrease-from 3 million to 1.7 million-in the number of policies sold between 2003 and 2004. When we looked earlier at the premium income figures for the same period-this is page 11 of the Lloyds submission-we did not see the change that the number of policies might superficially suggest. I will ask you why all this happened in a moment, but I want to ask you to explain why the premium income number remains extremely robust, whereas the number of policies you are selling has reduced almost to half.

Phil Loney: Can I just have a crack at that? I don’t know the root cause of this, but if you look at the series of numbers you are referring to, the oddity is the level of credit card PPI sales in 2003, which rose very substantially, and then fell away again in 2004. As I say, there is an ambiguity to me around whether these are LBG numbers, post-constructed, or just Lloyds TSB numbers. There was an acquisition by Lloyds of the Goldfish credit card business just before I joined in late 2003. This one-off increase in the credit card PPI sales in 2003 may be something to do with that, because as you can see, if you take that out, the overall total of sales in 2004 and 2002 are not so large. I think that what you are really looking at is a hump of credit card PPI sales in 2003.

Carol Sergeant: This was before my time, but trying to be helpful, my recollection is that in 2003 there was a big, big increase in credit card sales. One of the things I addressed when I came in was to look at that, because some of it had not been of great quality. So that book was then run down. I have no idea quite how that is reflected in these numbers, but I think that that may be a question that Lloyds could answer fairly easily by looking at the volumes of credit card sales and how they were subsequently cut back.

Q526 Rory Phillips: I am sure that would be helpful-thank you. It looks at the very least as though none of you was making a positive decision to reduce the number of policies sold to this degree. If you are right, Mr Loney, it looks as though it may have been no more than a blip due to the credit card point.

Phil Loney: The big change in numbers in this table is on the credit card line. There is more consistency in the numbers on the other lines.

Helen Weir: In response to the particular point of whether we were proactively reducing the number of policies sold, I think that we would want to make a very important point-I certainly would on my behalf-which is that we believed that the PPI product was a good product that met real customers’ needs. I still believe that it did that, having listened to customers and their needs. Therefore, at this particular point in time there would have been no reason to be taking proactive steps to reduce the number of policies. We believed that it was something that customers wanted. I sat in customer interviews where customers proactively requested the product. I used to do that on a regular basis when I visited branches. I sat in on customer meetings. Some of them were loan meetings where customers were requesting a loan, and on a number of occasions customers would say that they wanted this product because it gave them piece of mind. We did not come back to the research earlier, but I know that you, Phil, did a lot of research in the product area that reinforced that.

Phil Loney: Absolutely, yes. We did very comprehensive research in late 2003. Just after I joined, as you would expect, I did a full due diligence of the business and the product range that I took over. We then set about a refresh of the product and brought that new product to market in late 2004. If this is the right juncture to do so, I would be very happy to explain how we went about building the product up to meet customer needs.

Q527 Rory Phillips: Can we deal with that in a moment? Will you comment on this, which I think picks up on what you were saying, Ms Weir: do you take the view set out in the Lloyds submission that PPI was "a socially useful product"? If so, why?

Helen Weir: I do believe that it really met real customer needs, and that customers valued the peace of mind that it provided to them should they become-many customers did not, but a number did-either unemployed or ill, or should they die, during the period of their loan. I believe that it really met their needs. As I said, when I sat in customer interviews, I saw customers asking for this product because they recognised that they wanted that peace of mind, that assurance, as with other insurance products.

Q528 Rory Phillips: Were they not more concerned at getting peace of mind with the thought that if something went wrong, the product might actually pay up? We know, based on the claims figures across the industry, that they were very low in this sector, compared with, for example, motor or home insurance. That is right, isn’t it? That was one of the great complaints made by consumers and regulators over the years; it just was not delivering in the vast majority of cases, was it?

Phil Loney: In terms of the features and benefits of the product and people claiming, our product did deliver-90% of people who went through our claims process got their claims paid. We monitored reasons for declining claims very closely and were always looking to try to improve on that, but 90% got their claims paid.

You are absolutely right that the claims ratio-the claims as a percentage of the premium-was lower than you would see in other comparable products. I have seen motor insurance used as a comparable, but I have to say that that is not a great comparison because motor insurance is almost a compulsory purchase for many people and it is not sold face-to-face. If you look at products like life insurance, for instance, you might see a claims ratio of 60% to 65% as being more typical, and property insurance would again be in that kind of range in a normal year.

Absolutely, at the time of the Competition Commission figures that we provided, the claims ratios for our PPI products were between 20% and 50%, so the claims ratio was lower, but the reason for that was because the market price of PPI was high. It was not because we were constructing a product on which people could not claim; people could claim and they did claim. Our product did not just pay off the loan; for life insurance and critical illness claims it also made a contribution to your estate over and above paying off the loan. That was again something that was very different in the way that we designed our product compared to the rest of the marketplace and, in that way, it was a socially responsible product because, as I am sure you are aware, there is a very significant protection gap in the UK. I think that Swiss Re put the gap in protection at something like £2.4 trillion, and that came out at the individual level when we researched the requirements of customers for this type of product; they were very keen that it not only paid off the loan, but, particularly in the event of death, it made a contribution to their wider financial needs. It was the price of PPI that was the issue with the claims ratio.

Q529 Rory Phillips: May I suggest to you that there is a good dollop of hindsight in all of this? The studies that Which? and others did suggested that what people were concerned about was to get the basic product, which let us say in most cases was the loan, and they were not really interested in the add-on that they were sold at the same time. All they were concerned about was that they got the loan. We have heard from you already that it was the PPI that made commercial sense of the loan because the loan conditions were so competitive, so was it not that commercial value to the bank, your bank included, that was really driving the huge expansion in PPI sales rather than a philanthropic wish to help out your customers?

Phil Loney: It is not a philanthropic wish. I do not think that there is necessarily any conflict of interest between an organisation wanting to make a profit and meet customers’ needs, and our strategy was very much about trying to make profit by meeting customers’ needs. The reality is that, at a period when credit was growing quite rapidly, people were taking on bigger commitments and loans were over longer periods of time, people had-our research showed this-very practical considerations: "How am I going to pay this off?"; "What happens in the event of my death-are my family going to be lumbered with this debt?"; "What is going to happen if I lose my job?"; "What is going to happen if I become disabled or have an accident and can’t work?". Those are all real risks when you are taking on credit, and our PPI product was designed to deal with those. And in 90% of cases claims were paid.

Q530 Rory Phillips: But PPI would deal with those concerns only if there was a realistic prospect that the person who had taken out the policy would actually recover funds. As you know, from all the FSA work, there were so many exclusions and bits of small print and the whole thing was so unnecessarily complicated that, actually, when something went wrong, in the vast majority of cases people discovered that they could not recover under these products. That is why, as you know perfectly well, the regulators built up a case against them until eventually you and others stopped selling them. Do you not accept that, for many people, this reassurance for many people was illusory?

Phil Loney: I do not accept that as far as the Lloyds TSB products are concerned. I come back to what is the key test of that argument, which is: if there were so many issues with making a claim, how many people who made a claim actually got their claim paid? The reality is that 90% of our customers who made a claim got their claim paid.

Q531 Rory Phillips: Can I put to you some numbers that we have produced, doing what we can from the limited information in the submission? On the ratio of claims value to premium income for Lloyds TSB between 2000 and 2010, we believe, based on these numbers, that the ratio varies between 1:14 and 1:23-that is claims value to premium income. If it is right, that suggests, does it not, either that there was a very low rate of paid claims or that the claims paid were very small compared with the huge premium income figures that we have been seeing? It must be one of those, mustn’t it?

Phil Loney: Can I just clarify something? You have based that on the numbers that are in the Lloyds’ disclosure.

Q532 Rory Phillips: Yes. I am afraid that that is all we can do.

Phil Loney: Of course. As I tried to explain earlier on, the vast majority of the claims that were paid on our payment protection insurance are not shown in Lloyds’ disclosure. Our payment protection product had two elements to it. You have to write short-term claims-unemployment claims and short-term disability claims-are written in a general insurance fund. Those are the numbers that are shown in here. It is about £30 million a year, and is fairly constant over the period from 2002 to 2006. The cost of the vast majority of our claims-particularly because we actually paid out a larger amount on life insurance and critical illness claims than other organisations did, so it did not just pay off your loan, it also helped to close some of the under-insurance gap-the cost of all of those claims is shown in the books of the life insurer that underwrote that business for us. Over this period, that was mainly Prudential.

To get round the issue that the claims for life insurance and critical illness were shown in a separate company’s books, at the time that we made our submission, which was slap bang in this period, the Competition Commission asked us to set out in detail what happens to £100 of premium. Lloyds can provide you with that table. What it showed was that for loan protection insurance the claims ratio was 20%; for card protection insurance the claims ratio was 40%; and for mortgage payment protection insurance it was around 50%. I see that Lloyds have provided you with some more up-to-date figures for 2010, which show a claims ratio of about 30%. The problem is that the majority of claims were paid out on life insurance and over the period of these figures that was with an external company and will show up in their P and L, not in the Lloyds’ P and L.

Q533 Rory Phillips: Are you therefore saying that the figures on page 11, which I have spent some time talking to you about and on which we have been working, are simply wrong or misleading?

Phil Loney: I am saying to you that they are correct in terms of the amount of contribution that PPI made to the group’s accounts, but they do not contain all of the claims that customers made. As I pointed out right at the beginning, the life insurance claims were netted off the income before it was paid from the life insurer into Lloyds TSB.

Q534 Mark Garnier: I find it rather surprising that you are accounting premium income from a different account ledger for payments on some of the products, but not the other products. Surely you must have some consistency across your accounting policy in order to show like with like, mustn’t you?

Phil Loney: Yes. What is actually happening is that we are underwriting a certain part of the product ourselves, which is the short-term unemployment, and we are broking the long-term business. Therefore we do not show the claims, because we are not the carrier of risk.

Q535 Mark Garnier: From what I understand you are accounting for premium income in one ledger, but the payment-or the claims-is being accounted for under two ledgers. Therefore the stuff that you are accounting for as premium income as brokerage is being lumped together in the same book, as it were.

Phil Loney: What is here as income is a mixture of commission from the life insurer and the earned premium in the general insurance company. Those are brought together in these summary figures in order to arrive at a contribution figure, which was what the Competition Commission asked for. As I mentioned earlier, this was not the way that Lloyds looked at the profitability of the product; it really looked at it in combination with lending.

Q536 Mark Garnier: So the figures that we have been presented with are just simplified figures and do not show your proper accounting practice?

Phil Loney: Yes. They are a reconstruction of some of the external reporting. You don’t have the full picture of the amount of claims that we paid from these figures. It has led to people like Which?-I saw their evidence-saying that we had an 87% margin, based on these kind of figures. I understand that that is where that comes from, but this does not show the totality of claims that we paid.

Q537 Rory Phillips: It sounds as though you may have a public relations task ahead-or the bank may now-in order to correct what seems to be a very widespread misapprehension. Can I ask you please to focus on the issue you raised before about the social usefulness of the product? It’s a theme taken up in the submission. In particular, please look at page 3, at the top, where it is said that in the first decade of the century, "the market for free standing protection products … was not developed" and therefore customers had, as it were, a tough decision between an unsecured loan, and a protected loan. It is not quite true, is it, to say that payment protection insurance was the only protection? There were, weren’t there, income protection products available during this period for sale in the market? For example, Which? contrasted them very favourably in 2005 with payment protection insurance. What was it about PPI that was so appealing to you, if you had this customer concern in mind, that you kept selling it in such large numbers throughout the whole of the decade, until 2009? Was it not the profit?

Phil Loney: The key distinction is that income protection is an alternative product, but it is a very small market. Frankly, income protection is a flop in the UK marketplace; it accounts for a very small amount of the market place. It has struggled so much because people do not routinely think about protecting themselves-their life, their income, protecting themselves against critical illness, and so on-outside of situations where they are taking on a significant call on their cash flow, so a significant outgoing. That is why most life insurance in the UK is sold in relation to mortgages, because that is the time when people are thinking about such things, as well as the lender obviously having an interest in it.

Given that, potentially, the customer was taking out quite a decent sized piece of credit, protecting the payment was a more effective way of engaging them in thinking about their protection needs, rather than having a separate conversation, which would have required much more information, about protecting their income.

Q538 Rory Phillips: But was it not also a more expensive product, generally?

Phil Loney: What? PPI?

Rory Phillips: Yes.

Phil Loney: Certainly, the claims ratios on PPI would have been lower, and the price was higher because it subsidised the loan, that’s true.

Q539 Rory Phillips: Some of the figures that the Commission has been given, not least by the FSA, are quite staggering. I am not suggesting, because I don’t know, that they were Lloyds’ policies, but there is one case, for example, where it turned out that somebody was required to pay over the term of the contract £21,000 for a maximum recovery of £31,000. That is obviously an absurd premium. It was a very, very profitable business, for you and others, wasn’t it?

Phil Loney: Not in the way that we looked at it within our business.

Q540 Rory Phillips: Is that because you always looked at it with other products?

Phil Loney: Yes. That is exactly right.

Q541 Rory Phillips: Is that why it has been so difficult to get the profitability figures from the bank? Imagine this: imagine problems occurring. You are at board level, or just below, and problems are occurring in a product that you are selling in the millions, and from which your premium income is measured also in the hundreds of millions of pounds. Presumably, when you are considering FSA challenges, consumer unrest and customer dissatisfaction, one of the key pieces of information at your level, Ms Weir, that you need is, "What is this product worth to us?" as a bank. I don’t mean in terms of social usefulness, I mean in terms of income and profitability. You can’t take decisions such as, "We’re going to stop selling X" can you, until you have all those numbers in front of you? You must surely have had an idea at the time of what it was worth to the bank.

Helen Weir: You have already said, and we have agreed, that we knew that this was a profitable product in isolation and that it made a significant contribution to the business. I don’t think that we are disagreeing with that. What I would say is that that was not the way that we typically looked at the numbers internally, as we have already said. The issues that were being raised by the FSA pertained primarily to the sales process, and the way in which our selling process was compliant. In fact, I cannot recall any really significant issues being raised by the FSA about the product per se. This might just be my recollection. I don’t know whether Carol recalls.

Carol Sergeant: No. I don’t recall the FSA raising any serious issues about the product. Occasionally they mentioned it, but the whole drive was about the sales process and how we were both to execute it and evidence it to meet the principles. That was a kind of voyage of discovery, because the whole approach to principles was being developed alongside. The second thing is that PPI was discussed, well treating customers fairly was discussed very frequently right up to board level.

Q542 Rory Phillips: Sorry to interrupt. For the transcript, treating customers fairly is one of the FSA’s principles: principle 6. It was a principle in place since the FSA came into being right at the beginning in 2001 when you were there, wasn’t it?

Carol Sergeant: Yes. It was a principle, but it was executed somewhat differently in the conduct area from the prudential area. The FSA at around this time said it wanted to move away from a more rules-based approach in the conduct area, which is what had been inherited from previous regulators, and move to a more principles-based regulation in the same way that it had in the prudential area.

The other thing that I would like to add if I may, is that PPI was discussed very frequently at the group executive committee and the board, because over this time, from about 2006 onwards, it became a more and more challenging issue. I do not recall at any time that profitability was discussed. It was, "How are we going to mend the product? Let’s have another look at it. What are the external people that we need to listen to very hard saying?" As well as having very intensive supervision from the FSA-rightly so, as we were the biggest player in the market, so I had no problem with that; that was the right thing to do-we had extraordinarily intense scrutiny. I am happy to go into that if you would like. In addition, we wanted to be at least as good as the FSA but rather better. If I can give you an example. In the prudential area of regulation, the FSA would set us a minimum capital ratio, and we would work to a minimum of 25% above that. That is what we wanted to do here.

In addition to the FSA being all over us, we had endless external consultants as well, helping us, advising us on what was the right thing to do, throughout this period. I promise you, to my recollection, when we discussed PPI-how we were going to address the challenges and difficulties-and even when we decided to exit, the profitability was a consequence not a driver.

Q543 Rory Phillips: You are saying that in none of the considerations during this period from 2005-when, as we see from the numbers, there is in fact gradual decline, with until the single premium ending in 2009-that at none of those stages, when making those decisions about reducing exposure, was the question of profitability considered.

Carol Sergeant: It was not a driver, it was a consequence. Whenever I would go to the risk committee or the board to discuss the issue, the first element of the discussion was, "What is the problem here? Where are we? How do we compare with peer group? What is the regulator saying? What is the right thing to do?" To the extent that there was a discussion about profitability that was very much a consequence.

I think it might be helpful to explain what kind of a business Lloyds was and is. The company philosophy was organic growth. If you want organic growth you have to keep your customers happy all the time. You cannot afford reputational damage; you cannot afford for your customers not to like what you are doing. Otherwise, it is a different business model. There are other types of banking that have different business models. That was absolutely crucial. What the regulator thought about us was really crucial. As I say, it is my recollection that to the extent that the profitability was ever discussed, it was a consequence of doing whatever we were going to do. My recollection of the decision to withdraw from single premium was absolutely that-"We are going to do this." "There is a consequence". "Well, so be it."

Q544 Rory Phillips: By then-it happened at the beginning of 2009, and you explained you took the decision in the summer of 2008-that is way into the story with the FSA, as we know. Presumably, looking at the numbers and the fact that they go down in the preceding years, some decision had been taken to reduce the amount of business done in this sector in, for example, 2006 and 2007. Was that something-a decision like that-taken without reference to the income that the product brought into the bank? It is hard to believe, if I may say so.

Helen Weir: During that period, I did not have direct accountability for the product, but my recollection of the period is that a number of factors would naturally have resulted in the fall that you are observing. One is loan levels reduced-the number of loan sales reduced quite significantly, particularly as you go through the crisis, so that would inevitably reduce the number of premiums. The second thing would be the channel mix changed through which sales were being made, and that would have had an impact as well. Again, I cannot speak specifically about the decision making within the product area, but from where I sat overall, I could see there would be some factors that would cause the reduction. Certainly at board level and in conversations with the division, the issue about "Well, we need to make up profitability from PPI", or something-was not part of the conversation, absolutely.

Q545 Rory Phillips: Can we now turn to sales? As you say, a lot of the focus of the FSA and indeed, other bodies concerned, was the way these products were sold. Mr Loney, can I ask you whether there were target penetration rates for PPI?
Phil Loney: I was not responsible for sales.

Q546 Rory Phillips: Do you know the answer to the question?

Phil Loney: I do not believe there were any target penetration rates for PPI.

Q547 Rory Phillips: So the whole thing was left at large, was it? So if people managed to persuade a customer to take PPI at the same time as taking out some other product, that is all well and good, but there were no targets.

Phil Loney: There was a branch incentive programme, which covered all the group’s products. Helen will know more about the detail of that than I do, but there were no specific targets that I am aware of for PPI penetration rates.

Q548 Rory Phillips: Are you saying that there were no incentives to people selling this product in your branches?

Phil Loney: There was an overall branch programme with a variable amount of reward, which covered the whole range of products that people sold, and PPI would have been a part of that, is my understanding.

Q549 Rory Phillips: Did other products have target penetration rates?

Phil Loney: Not that I am aware of.

Q550 Rory Phillips: So far as the commercial viability is concerned, we have already discussed the fact that the personal loan market was very difficult and that the PPI add-on, as it were, helped-just to put it as neutrally as I can. If even that very low-key way of putting it is right, surely there was a strong incentive on those at the sharp end-at the front line-to make sure, if they could, that when an unsecured loan was taken out, this product, which did bring in profit, would also be there as part of the package. Putting the social responsibility to one side, just for that very basic good commercial sense reason, isn’t that fair?

Helen Weir: The people who worked in our branches-our customer advisers and banking managers-had no visibility of the profitability of individual products. That was not something they were necessarily aware of. That was not information that was provided to them, so that is the first point that it is important to make. The second point, based on my experience and the culture that we had within the bank, is that our front-line colleagues very much wanted to do the right thing for the customer. As Carol says, our strategy was based around building relationships with our customers. In fact, we said that we wanted to be Britain’s most recommended bank, and being most recommended means that customers like you, they trust you, and they know that you have their interests at heart, so that was very important to us. That is the second point. The only way in which our customer advisers would have had any visibility or any incentives is through the incentive scheme. I can absolutely confirm in response to your previous questions to Phil that there were no targets, by product, for any product across the business in any of the time when I was running the retail bank and, I believe, for some period prior to that.

Q551 Rory Phillips: Looking then at incentive schemes, the Commission has been provided with details of the 2009 one which, of course, is rather late in our story, but there we go, that is what we have got. It shows that branch staff at all levels were eligible for bonuses linked directly to product sales. The effect of that, presumably, is twofold. First, it encourages the people on the front line to increase their sales but presumably it also encourages their managers to put pressure on them to achieve sales for exactly the same reason. That would seem obvious wouldn’t it?

Helen Weir: It is absolutely true that there was a sales incentive plan.

Q552 Rory Phillips: There was a sales culture, wasn’t there?

Helen Weir: I would not necessarily say that. I think there was a sales and service culture. Service was something that we emphasised very strongly through the bank. We had introduced prior to 2008 net promoter scores-the way in which we measured-and that was reported. If you went into a branch and you saw the whiteboard you would certainly see sales levels, but you would also see net promoter scores. When I went around the branches and I talked to branch managers and I talked to branch colleagues, I would talk both about how they were doing against their sales targets-which did exist-but also how they were doing on their service. In fact, we introduced service as a key component of the incentive plan. My recollection was that that was 2009 again.

Q553 Rory Phillips: Again, we can only do what we can with the material we have been given. The Which? evidence to this panel, for example, in relation to one of your PPI products was that if salesmen did not sell 50% of the loans with PPI their bonuses were reduced by 25%. That is some pressure on staff isn’t it?

Helen Weir: There were no targets directly linked to any products.

Q554 Rory Phillips: So you are saying that Which? are wrong about that.

Helen Weir: I don’t know where they got that information, but there were absolutely none-certainly when I took over the retail bank that was not the case. My belief is that it was the case for none of the time that I was there.

Q555 Rory Phillips: Do you reject the suggestion that, in what is described as a sales culture, if you didn’t meet that target of 50% you were identified as having a training need, in other words something needed to be worked on? Does that not ring a bell with you?

Helen Weir: No, that absolutely does not ring a bell.

Q556 Rory Phillips: What did you do from your august level in the organisation to make sure, given all the concern that the FSA was expressing about your selling process, that these sort of unfortunate sales pressures were not operating in your branches and among your staff?

Helen Weir: There were a number of ways in which we monitored our sales process to make sure that it not only was compliant, but met customer needs, because meeting customer needs was very important to us. We monitored through things such as observed interviews-I sat in on some-but equally each of our customer advisers would have observed customer meetings on a regular basis, which would include quite specifically PPI sales. Equally, we had a number of post-sale monitoring approaches. One of the key ones was our risk reporting, which would be measuring against each of our sales advisers or customer advisers things such as take-up rates, cancellation rates and penetration levels. Subsequently, we got to a point where most of our sales process was conducted through a "Your Finances" system, which was a computer-based system with a computer screen that was shared with the customer and went through all the different elements of the PPI product, and included in that were questions around eligibility and suitability. Again, this was all shared with the customer so that they could see what was happening on screen

Q557 Rory Phillips: Could you give a date for that? I am sorry to interrupt you.

Helen Weir: I think "Your Finances" was introduced in 2005 to 2006. It was further refined as we went through this time.

Carol Sergeant: If I can just add, it replaced a paper-based system. There was a paper-based system, but obviously that is not so easy to monitor, and also it is not so visible to the customer, which is very important. This was a screen-based system, so the adviser and the customer could sit down together and watch this.

From a risk point of view, I took a considerable interest in the incentive schemes. One of the things-I have not got a list of papers here-that I hope came out in the material that you got from Lloyds is that there was something we called a risk gateway, which was a requirement that before any adviser in the branch was eligible to receive any commission whatsoever, they had to pass various tests, which included things such as whether they had done all their training, whether it was up to date, what their scores were-because there were online product tests and all kinds of other tests-how they had done in their observations, how the quality of their sales looked when they were reviewed after events, what complaints they had attracted and so on. That was why we called it the gateway.

Before you could even become eligible for any kind of a commission, no matter how much product you had sold, you had to pass through that test. If you failed it fairly severely, obviously you were removed from that. If you failed it not too severely, you were retrained. My recollection is that the main element of the retraining of branch staff was to meet that requirement. They would then go right back to base, and start off from the beginning with a 10-week probation period and all the rest that went with that.

At a more senior level, there was the balanced scorecard for assessment. Customer treatment was incredibly important, given our whole strategy, and there were various metrics to assess that. You were assessed very explicitly on risk and on how you managed your people. That included staff engagement surveys. We asked many questions all the time in our staff engagement survey, which we continued to refine. It asked staff how they felt about how they were motivated to deal with customers. We got well above national norm scores on that. We monitored it, and that then reflected on senior management’s overall remuneration-depending on how well some of those elements scored. There was quite a lot that people had to pass before they were even eligible to get a commission.

Q558 Rory Phillips: Did you consult your staff unions about their concerns about pressure to sell?

Carol Sergeant: There were regular discussions with the unions, as there always are.

Q559 Rory Phillips: On this specific issue.

Carol Sergeant: I did not speak to the unions myself. I do not remember ever being told that the unions had raised an issue about staff being pressurised to sell. I am sure I would remember that, but people are welcome to check that out.

Q560 Rory Phillips: They were doing a bit more than that. In relation to HBOS, Accord was passing motions at its conference in 2008 about-

Carol Sergeant: But Mr Phillips, I was not part of HBOS; it came to us later.

Rory Phillips: I understand, but presumably you were aware of some union concerns. Are you saying that the union in relation to Lloyds staff did not express similar concerns about the incentives schemes that Lloyds TSB was operating?

Carol Sergeant: If it did, I was not aware of that. I really have no recollection at all. I don’t know if others do?

Q561 Rory Phillips: So in general are you all saying that it was at no point brought to your attention, in your positions, that there was a risk that the incentive schemes that you operated were encouraging mis-selling?

Carol Sergeant: I would say that with any incentive scheme you have to be very conscious about potential unintended consequences. You want to be quite cautious about it and that is why we had the risk gateway and why we explicitly assessed other factors. That is why we very deliberately put those kinds of questions. There were a lot of questions in our staff engagement survey, particularly around this area, to allow people anonymously to tell us whether they had concerns. I would say that, yes, you always watch an incentives scheme, and all the things that Helen has mentioned and all the other things that we have monitored are all to check that out. I do not think that any of us ever felt that we did not have to watch it, but I do not recall a concern being explicitly expressed about that.

Q562 Rory Phillips: There was no reason for complacency at Lloyds about mis-selling, was there, because, as you know perfectly well, you were the subject of a very detailed FSA investigation that started as a result of its first thematic review? And, in due course, the matters that concerned the FSA were referred to enforcement, and they were finally resolved only in 2008. So mis-selling, Ms Sergeant, must have been very much on your radar in relation to PPI for a period of two or three years, with the FSA breathing down your neck.

Carol Sergeant: You are correct. The FSA did begin a very intensive scrutiny of the bank in 2005. Among the reasons given to us, which were completely understandable, were the general issues coming out of the thematic review and the fact that we were such a big player in the market. Those two things are perfectly okay. You accept that, if you are a big player in the market-

Q563 Rory Phillips: But it would have taken a little more than that to refer you to enforcement, wouldn’t it?

Carol Sergeant: It didn’t, actually. The basis of referral was, I think, a visit for a total of one day and a very small number of loan files-I cannot remember exactly how many-that proved afterwards to be incomplete, so they had an incomplete dataset. The referral, I think, was part of a whole new strategy of using thematic reviews and enforcement to force change in the industry-that is with the benefit of hindsight.

I had been out of the FSA for only a very short time when that happened-it was less than a couple of years-and I knew all about the enforcement referral process. Enforcement reported to me. Additionally, there had been the Strachan review, which looked at how enforcements should be done. The way we were put into enforcement did not comply with any of that.

The visits took place in July 2005 and were very short and very superficial-a few files. In September 2005, an FSA team came to a board meeting to give us feedback on what we used to call our ARROW review-they came in and looked at everything. They mentioned TCF, but that was quite rightly always on their agenda, along with credit, liquidity and all the other usual things, but at that board meeting they did not mention at all specific concerns about PPI, or that they had any intention of putting us into enforcement.

So between July and then, there was no suggestion from the FSA’s visit that they had particular concerns. They came to the board in September and raised no concerns specifically about PPI, and then suddenly we found ourselves in enforcement in November.

Q564 Lord Turnbull: This is 2005.

Carol Sergeant: This is 2005, when we had the whole new regime. I was very surprised, and we asked why it had done this. As I say, the answer, fundamentally, was that this was a new approach.

Q565 Lord Turnbull: Could it have been the CAB super-complaint?

Carol Sergeant: That could well have had something to do with it. I do not want to speculate, but when we pressed, we were told that they had found some issues resulting out of its one-day visit. There were incomplete files, but they were never able to tell us what those issues were with any degree of specificity. When they wrote us the letter, it just said, "There might be issues under principles 3, 6 and 7," so there wasn’t a clue there.

I am not sure about this-I think some of it was in writing-but I got something from the FSA saying, "There were these issues but, also, we were very unhappy with the general market-wide thematic review. You are the biggest player in the market and therefore we want to have a very intensive process with you." I have no problem with the latter two things; they are absolutely the right thing. It is what I would have done at the FSA, but I am not sure I would have used that process to do it. The result was that, over a two-year period, they looked at just about everything you could look at in the company. They had detailed information right down to a local-area level on complaints, persistency3, premiums, commissions and you know not what. They looked at hundreds and hundreds of files; they spoke to salespeople at every level in the organisation, from the most junior to the most senior; they interviewed directly a large number of customers; and they went all over the remuneration systems4. To some level, that was reassuring. I do not want you to think that we just relied on the FSA-we certainly did not-but to have them crawl all over us in that degree of detail and, by the way, not to raise any of the issues that have subsequently become issues, like oral explanations or this whole flexibility business-

Q566 Rory Phillips: Can I just be clear about that, because it could be very important when the panel is looking at what the regulators did. Are you saying that during the whole of the two-year period of very close investigation into the Lloyds Group, the issues you have just talked about-oral representations, flexibility and so on-were not matters raised by the FSA?

Carol Sergeant: They were not matters raised as being material matters at all, to my recollection. One would have to crawl over the documents, but I do not remember that at all. I can assure you that had those issues been raised every utterance that came out of the FSA at that time, whether in a thematic review or a letter-I used to talk to other chief risk officers-for example, the 177 rules5 in ICOB, we attended rigorously to. We had confidence in what we were doing.

But to make it absolutely certain, throughout that period, there were consultants and experts of every variety in the company the whole time. These people were not just going down looking at the detailed sales processes. These expert consultants had access to everybody, from the CEO downwards, and they used that access. Throughout this period, we were working hard to meet whatever standard came out.

It was a period when expectations were constantly changing. Every time something became apparent that we should be doing on the sales process-the whole thing was about the sales process-we did it and did it and did it. We were aiming to become better. We were aiming for 25% above what the FSA wanted us to do, but every time we thought we had got there, something else came along.

Q567 Rory Phillips: So the rules kept changing. Is that what you are saying, in short?

Carol Sergeant: That was absolutely what it felt like.

Q568 Rory Phillips: In other words-we are now zooming forward to much more recently-as I understand it, with your responsibilities within the group, you were surprised that the FSA behaved as it did from 2005, sending you to enforcement. You believed then, as the years went on, that the problem here was that it was changing its position and the rules, rather than any fundamental problem with the selling of the product.

Carol Sergeant: No. We never thought we were perfect and we always wanted to be better. It was not quite as straightforward as that. In 2005, we looked at the eligibility criteria-

Q569 Rory Phillips: Is this following the first thematic review?

Carol Sergeant: Yes. We were told, as you have heard from others, that we were selling people products they could not claim on. That is not acceptable. We did a very detailed review, and I think it was something like less than 2% of cases in which there was any doubt that we had sold to someone who was not eligible. That was all compensated and dealt with, and the FSA was made fully aware.

In addition, we introduced a new requirement. First, we strengthened yet again the sales process, but then we also put a new requirement into the claims process-Phil will know the detail of that better than me. Basically, I said, "Look, if anyone claims and they are not eligible, we pay. If anybody has bought a policy and they end up not being eligible for it, there is no question-we just pay." That, I believe, is what has happened.

Q570 Rory Phillips: But the difficulty the panel faces is that if you were behaving in this way and taking this seriously and carefully, it is very hard to get from that position to the position now, where the cost of PPI to this group looks as though it is going to be at least £6 billion. It rather suggests, doesn’t it, that you may have been a little complacent at an earlier part of the story, for you-or the group, as you have all left-to end up now, in 2013, with an absolutely gigantic bill? Can all that really be put down to the FSA changing its position? Surely not. Ms Weir?

Helen Weir: No, I do not think that that is how I would characterise it, but neither would I characterise the activities that we had in place as being complacent. As Carol has described, we were very, very keen-because it was consistent both with the Lloyds culture and also what we wanted to achieve as a business-to ensure that we were compliant not just with the rules that existed, but with the principles that were in place.

Q571 Rory Phillips: That’s the key issue, isn’t it, as it emerged in the judicial review?

Helen Weir: It is very important, and what came through the judicial review process was that there was a fundamental misunderstanding by not only Lloyds but the industry about what those rules meant. On reflection, the FSA clearly announced a greater focus on principles-based regulation, which was something that we welcomed. Having an accounting background, we know that the UK has a principles-based accounting system and the US has a rules-based accounting system. I think that the profession in the UK would very much support the principles-based system; it is the right way to go.

However, with reflection, I think the transition towards that greater emphasis on principles was not easy. I would say that, with our very best endeavours, we tried to make that transition as best we could, both at Lloyds and in the industry as a whole, but fundamentally we ended up at a point where there was a misunderstanding about what that actually meant. That is something that we regret greatly, but I would argue that it was genuinely not complacency.

Q572 Rory Phillips: But the truth is, as we established earlier, that the principles at the heart of the judicial review had been in force and in place since the very beginning of the FSA’s tenure in 2001. That is right, is it not? Surely it is stretching credulity for you to suggest to the Commission, as I think you are still trying to do, that this entire problem, which is a very big problem for Lloyds, is based on "a misunderstanding." That is what it says in the submissions, and I noted that that was what you said just now. So is it right that the whole thing can be put down to "a genuine misunderstanding" between the industry and the regulators?

Helen Weir: No, I do not think that that is what I am saying.

Q573 Rory Phillips: You did not pick up the messages over the preceding six years.

Helen Weir: No, I am saying that that was a part of it, and I genuinely do believe that that was a part of it. I also believe, as we went through 2005 with the introduction of ICOB, and through 2007-08 with the introduction of ICOBS, the industry believed that those substantially represented-not fully represented, because the principles were there-what compliance with the principles would mean. The example that we gave earlier about flexibility was not something that we had considered. I do not know whether the regulator had considered it, but it certainly was not something that it flagged up earlier, either in conversations that we had directly with it, or as I understand it in ICOB or ICOBS, it was not flagged. However, as 2007-08 came, it was clear that this was an interpretation under the principles. We then acted to address that in the product that we sold. It was something that we had misunderstood at that particular point.

Was there mis-selling in the industry of the type that you referred to earlier around eligibility and other things of that type? Absolutely. Whenever we found that to be the case, as with the eligibility example that Carol gave, we did go back and remedy them. There was another example that I remember from our telephony operation when I had responsibility for it, where we felt that the information being disclosed to customers was not adequate, and we undertook a remediation exercise, I cannot remember: I think it was across up to 500,000 customers. I am not saying that it was all around a misunderstanding-there were different elements of mis-selling-but there was a fundamental misunderstanding. One thing that I take away from this is that, while principles-based regulation, accounting or whatever is a much better approach, we should have done better with the engagement that we as an industry should have had with the FSA-and with the FOS, because it first flagged some of these issues-over that period.

Q574 Rory Phillips: Can we just quickly go through the chronology? We find ourselves at 2011. Concerns and complaints were expressed about PPI before the FSA took over-in other words, in the Which? articles going back to the ’90s, leading to a reference by FOS, as the panel has heard, to the BBA as early as 2003. Then after the FSA we have the super-complaint in September 2005. One of the points that it raised-to pick up your earlier point, Ms Sergeant-was about mis-selling, about sales practices. So you knew, certainly by 2005, that this was an area that was giving rise to increasing customer concern and eventually to increasing regulatory pressure. Is that a fair summary?

Carol Sergeant: There were those issues and we certainly addressed them, but at that point the product had been around a long time. The complaints data, the FOS uphold rates and our own information from customers-all of that stuff-were not actually telling us there was a problem.

Q575 Rory Phillips: But just pausing on the FOS complaints stats, of course they were very low compared with the gigantic figures that we now have-you were always way ahead on the FOS complaints on PPI compared with your competitors. You were well into the hundreds by 2003, 2004, 2005 and 2006.

Carol Sergeant: I am sorry-numbers of complaints or uphold rates?

Rory Phillips: PPI complaints.

Carol Sergeant: The number of complaints per se was not what I focused on unless they became out of kilter with our volume of business. If we have a unit of 1,000 and we get 10 complaints, and that is the norm for any kind of thing, that is fine. The complaints levels relative to the numbers of products sold, to my recollection, were the same as others. What I looked at was in how many cases is the FOS finding in our favour and in how many cases are they finding against us, and why?

Q576 Rory Phillips: Well, the numbers that we have on that is 49%-

Carol Sergeant: Not-

Q577 Rory Phillips: In 2002. It was 33% in 2003, 27% in 2004, 24% in 2005 and 22% in 2006. I understand that these numbers include the HBOS figures, which obviously would not have been pertinent to you at that stage. But those are substantial figures, aren’t they?

Carol Sergeant: I cannot speak for the HBOS figures, only the numbers that I recollect, because I had a sort of threshold in my mind once the FOS uphold rate got below a certain level.

Q578 Rory Phillips: What was that?

Carol Sergeant: It certainly was lower than the figures that we had, which I recollect were about 80. You then look at why the FOS is not holding in your favour. You look at that very hard and carefully and you go back. If it is a systemic issue, you address it. So that was not a concern.

I agree that the super-complaint gave cause for concern. My recollection was that it was focused mainly on pricing. At that time, the FSA had taken over the regulation. There was a whole new approach and we were absolutely going through our business. I arrived in 2004, and the first thing I did was to look at the product. Phil had done a "drains up" on the product and looked at consumer feedback. We put a whole load of new processes in, including being mindful of what people outside the organisation were saying, as well as the regulatory requirements. We had no fewer than three audits between the middle of 2004 and the end of 2005 to satisfy ourselves that what we had put in place was meeting not only the FSA requirements, but any other concerns that we could see. So we were certainly taking account of those issues.

Q579 Rory Phillips: And you were carrying on through this period-2005 onwards-selling substantial numbers of PPI policies, weren’t you?

Carol Sergeant: We were selling the same volumes of PPI policies, as I recall it, relative to the amount of personal and other lending that we were writing. I do not recall that there was a change-

Q580 Rory Phillips: You were selling more than a million PPI policies for each and every one of 2005, 2006, 2007 and 2008, weren’t you?

Carol Sergeant: I am not sure whether those numbers cover just Lloyds TSB or HBOS, but-

Q581 Rory Phillips: They are for Lloyds TSB-take it from me.

Carol Sergeant: I am sure we were, yes. 6

Q582 Rory Phillips: Fine. So this is a period in which you were dealing with an FSA investigation, increasing regulatory pressure, and yet you were still selling policies in these volumes. Presumably this was all about profit, and about the effect on your bank of being able to add on a PPI product to the otherwise unprofitable unsecured loan.

Carol Sergeant: I don’t think that was the case. I think that throughout this period we were endeavouring to meet whatever requirements people imposed upon us and listening to everybody’s feedback, in an effort to continue selling the product safely. That was the main objective.

It was a continuous-how shall I put it?-period of improvement. With the benefit of hindsight, I agree with Helen; we should really have spoken. I mean, one of the non-executives actually raised it with the FSA in 2006, but we should really have had much deeper conversations with the FSA about how it would assess the principle’s implementation.

Let me just give two examples. We like principles, but how you actually execute them is a non-trivial consideration. There is a principle that central heating boilers should be safe and environmentally friendly. How you implement that principle changes over time and new standards come in. The UK signed up to the 1948 human rights convention. Until the mid-1970s, being fair to your fellow human being included significant discrimination against women, and then that changed.

I think that we believe in principles, but how you actually effect that in a way that gives sufficient clarity and certainty to consumers is a challenge that we-all of us-should have addressed much sooner.

Q583 Rory Phillips: It looks from the panel’s perspective as though a great deal of time and effort-you have given endless examples-was directed to the particular rules, the particular ICOB and ICOBS provisions, and making sure that you could show you were ticking all of those boxes, while unfortunately taking your eye off the ball in terms of the big points, the fundamental flaws with the way in which this product was sold. At least with hindsight, do you accept the validity of that criticism?

Carol Sergeant: I don’t think I do, because in parallel during this period the FSA, in addition to all the work on PPI, had a big push on implementing its whole principles approach to TCF. We produced regular reports to the FSA; FSA staff visited us and looked at what we are doing; and we took reports to the Board. The feedback from the FSA, in terms of our overarching treating customers fairly, was that we were making very good progress and that we were among the best in the industry.

It wasn’t that we were not trying to do that; it was the execution of it in the detail that subsequently turned out not to meet the principles. In addition, we were not just listening to the FSA. As I mentioned before, we had experts in-permanently, pretty much. Pretty much every expert that I can think of was in the company-sometimes two or three of them-throughout that period, challenging us, because we really had this aim to be better than the minimum and to be that 25% better. Those people had access all over: they were not just looking at the sales programme-

Q584 Rory Phillips: You have used that expression on a number of occasions. You must accept-mustn’t you?-that the statistics show that you were not better than the market. Your figures throughout this period, in terms of complaints to FOS, were considerably worse than those of your competitors; in most years, they were double those of your competitors. That suggests that, even by that measure at that time, you were not keeping up to anything like the standard that you have outlined for us.

Carol Sergeant: The numbers of complaints per product sold were not bad. We were the biggest player in that market, so in terms of the numbers of complaints that of itself was not something that-well, we did focus on it but the most important thing was, "What was FOS making of those complaints? What were their conclusions about those complaints?" That was the key issue.

Q585 Rory Phillips: In 2008, the number for your group, which includes HBOS, as I said before, was nearly 9,000 complaints about PPI; your rivals nearest to you, Barclays, at 3,500; and the uphold rate was 86%. That doesn’t sound as though you were on top of the problem at that point, does it?

Carol Sergeant: Well, I would say that by the date that you’re looking at, Lloyds TSB had bought HBOS. Lloyds TSB was No. 1 in this market and HBOS was No. 3 in this market. In fact, you know, between them Lloyds and HBOS were No. 1, 2 and 3 in pretty much all markets, so that statistic does not surprise me.

Q586 Rory Phillips: What about the uphold rate?

Carol Sergeant: And the uphold rate, by 2008-certainly that was something that had gone up to those kinds of levels for the whole industry, and we were very concerned about it.

Q587 Rory Phillips: And was that again a change of the rules by the FOS?

Carol Sergeant: Helen will know about this as well. It was quite difficult to understand why the uphold rate moved. I mean it had moved from roughly 80% in favour of the industry and then over a period of about a year it moved completely the other way. I think, was that around about the time of the super-complaint-the Competition Commission?

Q588 Rory Phillips: No.

Helen Weir: No, this was a bit before that.7

Carol Sergeant: But it suddenly moved, and we and everybody else in the industry asked the FOS-you know, because we wanted to understand this-and the FOS told us it was because prior to that the complaints had been all about claims. There had not been any complaints about selling, and after that the complaints became all about selling. That was an interesting piece of information because I am convinced that because of all the perfectly appropriate challenges we were getting-people should challenge an industry-both our and the industry’s collective sales process had actually improved rather than deteriorated over that period. That was the explanation as I recall it.

Helen Weir: That is correct. This is a very important period in the time that we are talking about, because this was the period where-we learned as we were going through-the uphold rate changed very significantly and quite dramatically over about 18 months, and very importantly, and we did have a number of conversations with the FOS. When I came in, in the middle of 2008, this was just happening, and in November 2008, I think it was, the FOS published the standards by which they were making these adjudications.

A key element, then, was related to the sort of thing that I have described earlier, which is about flexibility, which hadn’t been built in, so this was the point at which the different interpretations of what the principles meant began to become very evident to the industry as a whole. I think the other element was around things like oral disclosures, and then the evidencing of those oral disclosures, and that became very evident at this particular period. So I think there was something that we were concerned about, had not been evident to us previously, became evident over these 18 months or so and I think was the first indication of the subsequent course of events.

Q589 Rory Phillips: But you can’t ever have thought, can you, that it was appropriate for a salesman to misrepresent orally what was contained in the contract that he was selling? That cannot ever have been something you thought was acceptable?

Helen Weir: Absolutely not.

Q590 Rory Phillips: So this was not a new-fangled idea brought out of the sky by either the ombudsman, as you are suggesting, or the regulator. It was a fundamental point about fairness in contract, wasn’t it, and it had always been a fundamental point throughout the whole of the period we are considering?

Helen Weir: I think the issue here-and I absolutely agree it is never acceptable, and would never have been acceptable within Lloyds Bank-

Q591 Rory Phillips: And however many regulations are in place, however many audits have been undertaken, that basic principle about mis-selling was always there, wasn’t it?

Helen Weir: I absolutely agree that misrepresentation-I think under any kind or rules, or public decency-would have always been there, would have been part of our culture.8 The issue was not about misrepresentation; the issue was about disclosure-what was said orally in meetings versus what was in writing. As we moved through the ICOB/ICOBS period, initially it was indicated that a lot of this information should be given in writing. There was a debate through the period-this was before my time of being heavily involved; it was about 2007-as a precursor to some of the ICOBS rules about customers getting confused if there was too much information given orally and, therefore, about finding the right kind of balance so customers would have a not misleading understanding. Subsequently, the move-again, I support this-was that if you gave some important facts orally, then it was important to make sure everything was orally given so that there was an appropriate balance. All of those standards, we built into our "Your Finances" system, so we made sure that this information was being given orally. Obviously, that process was not in place historically, but by about 2008, that would have all been built into our systems, and some of it before that.

Carol Sergeant: It was actually 2006 or 2005.

Helen Weir: Some of it, but we continued to refine it during that period.

Q592 Rory Phillips: Is it fair, therefore, to say that that does not seem to be fully reflected in the numbers of complaints made to the FOS, which continue at an enormous level-90,000 last year for the whole group-with very high uphold rates? It sounds as though the measures you took have not in fact fed through to successful ways of defending claims in fault.

Helen Weir: One of the issues is that we were also required not only to have the system and process in place-we took both the FOS and the FSA through the "Your Finances" system-but to be able to demonstrate in any individual case that the information had been given. Clearly, it is very hard for us to evidence in any individual case, with an individual customer with a sale that may have taken place some significant period ago with a particular customer adviser, that that had actually been done. This was one of the major factors-one of the factors-that lay behind our decision subsequently to stop selling PPI in 2010, which is, again, a decision that I led. We did not feel it would be possible. We looked into things like recording-shall we record discussions with customers? I think we tested it, but it was very difficult to do administratively and to get the quality, and customers did not like it.

Q593 Rory Phillips: So that was 2010. We know the FSA began their work in 2005. We know that other banks-your competitors-were making changes in 2007, and the FSA confirmed that to us. Why did it take you until the middle of 2008 to decide to deal with single premium, and until 2010 to deal with regular-payment PPI?

Helen Weir: As I said earlier, we were one of the first banks to deal with single premium. We did make a number of changes-continual changes-to our processes from the period 2005 onwards, as a result of conversations with the regulators, so this was an evolving process. We absolutely made a number of changes through that to build more of these checks into the process. In 2008, we made the decision to move to regular premium. Subsequently, we kept refining our processes, looking at ways in which we could provide the evidence. So I do not believe it is a fair reflection to say that we were complacent or interested in the profitability; we were genuinely wanting to do what we thought the right thing for customers was. We genuinely held then, and do hold now, the belief that this can be a good product for a number of customers, so we wanted to ensure that those customers’ were still being met.

Phil Loney: Please remember we were working on aspects of single premium-particularly rebate, which I covered earlier-as early as 2004, so well ahead of FSA regulation.

Q594 Rory Phillips: On the FSA point, can I put to you this evidence, which the panel received earlier in its hearings from the FSA? There was a suggestion that you and the other banks were prepared to make superficial changes in response to the FSA’s criticisms, but not to do anything that would have interfered with the significant income and profit derived from the product. We have heard a lot about how anxiously you considered their points and how you tried to address them. Wasn’t profit actually driving your continued sales of this product until 2010?

Helen Weir: That is certainly not a reflection of the conversations in which I took part during my period at the bank, nor of what I saw of the culture of the bank. I think the fact that we made the decision to move to a regular premium product ahead of any requirement to do so or request to do so from the FSA, which they then required other banks to do, would indicate that profitability was not the primary consideration.

Q595 Rory Phillips: Well, we are now, as they say, where we are, despite all the many, many efforts that you have outlined at great length this morning as to how you attempted to come to grips with the problem. The problem is an immense problem for this bank-£6 billion. Can I ask you please individually, starting with you, Mr Loney: do you accept any responsibility for the £6 billion cost to the bank of PPI?

Phil Loney: Clearly, against the standards that emerged in 2009, there has been widespread mis-selling, so everybody involved has a responsibility for that, and I am very sorry for the situation that we have arrived at. As Helen said earlier, my whole experience of working in the culture of Lloyds was of an organisation which was trying to do the right thing by its customers, design its products for those customers and sell them in a respectable way to those customers, based on their needs. We acted in good faith all the way through in order to do that. Clearly, it turned out in 2009 that we had not fully comprehended the extent to which some of the principles needed to be applied, particularly in terms of verbal disclosures that needed to be made, and I am very sorry about that.

Helen Weir: I would absolutely agree with what Phil has said. I acknowledge the mis-selling of PPI across the industry and at Lloyds and apologise wholeheartedly for my part in that. What I would add is that I did, at all times, act in good faith and try to do the right thing according to not just the rules, but also the standards. But I recognise that significant customer compensation has had to be paid or will have to be paid and also, equally importantly, customer trust in the banking sector has been reduced. I think that is very important.

The other factor that I think is also of great regret is the relationship between the banks and the regulator, which is not a good place to be. I welcome strong regulation; I think it is a good thing. The fact that the relationship between the banks and the regulator deteriorated I also regret at this period.

Carol Sergeant: I agree. I was in post when this happened, so clearly I bear an accountability. I feel I also bear an accountability for not taking up with the FSA more clearly at the outset what principles-based regulation meant in the conduct area. I made the wrong assumption, because it had worked in other parts of the forest, that we would know how it would work; and as time went on, I also made the wrong assumption that by continuing to address the various issues that were coming out of the thematic reports and all the rest of it, this could be mended. I think the FSA themselves took the view that this could be mended, and when they came out with their final statement, we said, "Now we’ve mended it." So I do bear an accountability for that.

I agree with Helen it is not just the industry’s reputation. I think the relationship that the industry now has with the regulator is not a good place to be, and one should never, if one can possibly avoid it-we have to avoid it-try to address issues like this through the courts. That is just not a good way to proceed, and we have to make an enormous amount of effort-all of us-to make sure that these issues never get to that position where they end up in the courts. That is not a good place to be.

Rory Phillips: Thank you very much.

Q596 Chair: Thank you. I would like to look at the case of Harrisons v. Black Horse. The website of Black Horse at the time said, "No one likes to think about the unexpected"-this is October 2004-"We can’t tell if something unfortunate is going to happen to you or when, but for a little extra each month, you can give yourself and your family the comfort of knowing that your repayments can still be made should your circumstances unexpectedly take a turn for the worse, subject to the terms and conditions of the policy." That ties in with what you have said, Helen and Phil, about this meeting real customer needs and being a socially responsible product.

I looked at the case, and the appeal was withdrawn on 29 August 2012. They took the case under the claim of "unfair relationships", under section 40 of the Consumer Credit Act 1974. The Court of Appeal dismissed it. While dismissing it, it said, "Although the level of commission received (87%) was ‘quite startling’ this on its own did not render the relationship between the borrowers and the lender unfair."

If we could recap on what it was. In July 2003, the Harrisons took out a loan of £46,000 and were sold a single premium PPI policy costing £11,500, so the total borrowed was £57,500. Three years later, in July 2006, £54,815 of the loan was still outstanding. To refinance that, the Harrisons took out a loan of £60,000 and were sold a single premium PPI policy costing £10,200. So the total was £70,200. The bank earned a commission of 87% of that £10,200 premium, so that was a total of £8,877.49. It did not disclose this fact to the Harrisons. The PPI policy lasted five years, but the cost of it would be paid over the entire 23-year loan, so the monthly repayments were £440.10 for the loan, and £75.50 for the PPI. That meant that the total cost of the PPI over the terms of the loan was £20,636. It covered life, disability and unemployment.

Under the PPI, the Harrisons each had life cover for up to a maximum of £75,000. Mr Harrison had disability benefits that would commence 45 days after the start of disability, which gave payment protection for the loan up to a maximum of 24 months for any one claim, and 36 months in total. Redundancy benefits were 12 and 24 months respectively, and started after 60 days unemployment. But, as noted above, the PPI expired after five years, and, unless the loans were discharged early, the monthly repayment in respect of the premium and interest would continue for the life of the loan, for 23 years. The maximum benefits, therefore, payable under the disability and unemployment elements, were £18,705.60 less than the total cost of the insurance over the 23-year loan. Why did Lloyds design and sell such poor value PPI policies that they paid 87% commission?

Phil Loney: This was the 2004 case-

Q597 Chair: This is this case in the Court of Appeal. The Court of Appeal has said, in writing, that it was 87% commission. Why did Lloyds design policies like that?

Phil Loney: Okay, we did not in the time that I was running the general insurance business. So we-

Q598 Chair: I am interested in Lloyds here. It is July 2003 onwards. Why did Lloyds design such poor value PPI policies? One of you must know. When I discussed the matter with the chairman of Lloyds a couple of years ago, he said that it would be absurd for anyone in the organisation not to ask about the market here. If you have an 87% return, there is not a market here at all. He could not understand what was happening and we are trying to get to this-this 80% commission. Why did it design that, Helen?

Helen Weir: I cannot answer that question.

Phil Loney: I am sorry, but the product was not designed in the time that I worked for Lloyds.

Chair: Okay. I will not waste more time, but go on to the next question. I want to get an answer from Lloyds, whether or not it is from you, so I will come back to that.

Why did Lloyds sell policies that only lasted for five years when a loan lasted for up to 25 years? Did senior management approve of the design of them?

Phil Loney: I did not approve the design.

Q599 Chair: Hear no evil, see no evil. Why would a bank sell someone a PPI policy that was so expensive that the amount paid for it exceeded the maximum benefit if the consumer was unemployed or disabled? Nothing to do with you?

Phil Loney: All I can say is that the reality in the PPI market was that it was a very highly priced product, and it was used to subsidise the loan that went with it. The bank looked at value to customers in the round-the loan and the PPI together.

Q600 Mark Garnier: Helen Weir, can we talk a bit about your period as the chief financial officer from 2004 to 2007?9 During that time, presumably you would have been preparing management accounts and predicting what revenue was roughly going to be. How did you set about deciding what next year’s income is going to be, in the broadest sense?

Helen Weir: I think there are two or three factors that one would take into account: the overall performance in the current year, and what a reasonable year-on-year increase might look like by reference to what we believed was going to be happening in the marketplace, by reference to our competitor performance and whether we were underperforming, by reference to our customers and what we believed the trends in terms of our customer needs were likely to be, and by reference to what market expectations would be. Those are the sorts of factors that we took into account.

Q601 Mark Garnier: So presumably when you are preparing these forward-looking management accounts, you would divide them by divisions-by business groups and those kinds of things.

Helen Weir: At the group level, we used to look at them by division.

Q602 Mark Garnier: And with division, can you give me an idea-

Helen Weir: So that would be retail, wholesale, insurance.

Q603 Mark Garnier: Okay. So presumably the bloke in charge of the retail side of it would then be part of that process. He would then look at the slightly lower level down.

Helen Weir: He would be looking at the lower level down, that is correct.

Q604 Mark Garnier: So they would be getting together in this large scheme and trying to come up with a picture of what the vision was going to be like for the next year?

Helen Weir: Yes, that is correct.

Q605 Mark Garnier: And as you get further and further down the scale, you get more and more granular in the approach, ultimately, of how each individual is going to do.

Helen Weir: Yes.

Q606 Mark Garnier: You said repeatedly that there were no targets set for PPI. None the less, there would be an expectation for products and for performance of individuals, wouldn’t there?

Helen Weir: When you say performance of individuals, do you mean at a branch level?

Q607 Mark Garnier: At a branch level. Presumably a branch manager would look across at his staff and say to himself, "My regional chief expects me to make x performance, and in order for me to achieve that, my individual staff have got to make y performance."

Helen Weir: For the overall level of sales at a particular branch, yes, but absolutely nothing linked into any particular product.

Q608 Mark Garnier: No, absolutely right. None the less, right at the top you say, "Next year Lloyds bank is expected to make-whatever." That divides across a certain number of divisions and comes down to the regions and the branches.

Helen Weir: It actually works both ways.

Mark Garnier: Sure, I appreciate that.

Helen Weir: Because we also look at what the opportunities are for any particular branch: what customers that branch had, what unmet customer needs it had-if one were to benchmark a branch that looked similar in terms of customer profile, where do we feel there are areas of unmet need-what the size of its catchment was, and therefore what its opportunity to attract new customers was. So it was a two-way thing. It was top-down, but also bottom-up.

Q609 Mark Garnier: Sure. That is absolutely the right way of doing it. Presumably at the core of all this would be your predictions about how the loan book would be growing, particularly on the retail side?

Helen Weir: That would be one element of it.

Q610 Mark Garnier: You are a bank, so that is absolutely core to your business, isn’t it?

Helen Weir: Well, mortgages, savings. In fact, unsecured lending is a smaller book than those other books.

Q611 Mark Garnier: None the less, apart from saving, you just talked about the loan book. I mean, the loan book is mortgages.

Helen Weir: Loans, mortgages, savings, yes.

Q612 Mark Garnier: And you would divide that up into a number of different areas. None the less, you are looking at a loan book as a general premise. And loan books get down to a branch level. I mean, there must be an expectation of what each branch will be lending in one form or another.

Helen Weir: At the branch level we would not necessarily look at the size of the loan book per se.

Q613 Mark Garnier: But you would at a regional level. You would at a country level, wouldn’t you?

Helen Weir: We certainly did at a company level-at the divisional level. For retail, we would see the size of the unsecured lending, the secured lending and the sales.

Q614 Mark Garnier: But you wouldn’t be looking at European retail, would you? You would be looking at UK retail.

Helen Weir: Yes, that’s right.

Q615 Mark Garnier: So you have an idea of the country. It is not unreasonable to say, "Well, the midlands are not quite doing as well as the south-east, so therefore we need to allocate loan demand, which is more likely to be higher in the south-east"?

Helen Weir: We would not allocate particular product demand to any particular region-in my recollection.

Mark Garnier: But loan capacity must be-

Helen Weir: Not to a regional level-I am sorry.

Q616 Mark Garnier: Okay. That is fair enough. Also, allocation between products-between mortgages, unsecured loans and that kind of stuff.

Helen Weir: We had an expected rate of growth, for which we took into account the factors I mentioned earlier, particularly what the market demand was likely to be. There are market industry data that talk about that. We had that at the category level, yes.

Q617 Mark Garnier: So from one year to the next, looking forward, you could say, "In our current, historic year we are just finishing, unsecured loans were x. Given what we know, unsecured loans will go up by"-

Helen Weir: We would have a view on that, and that would underpin the budget, as you are indicating.

Q618 Mark Garnier: Absolutely right. That would underpin the budget-very key. Now, we know from what you said earlier that these unsecured loans in particular were making very little money, if not no money at all, and therefore they had to be bundled with something else, in order to make them profitable.

Helen Weir: The category as a whole, including PPI, was making very little money.

Q619 Mark Garnier: What I am finding very difficult to come to terms with is the fact that you did not have any clue as to what your PPI sales would be in any subsequent year going forward, and that you were not making a significant allocation of revenue, in terms of your predictions, to things like PPI.

Helen Weir: No, I think perhaps I mis-said, if that is the impression that I left. At the aggregate level, there would be an expectation of what the sales of loans would be, what sales of PPI would be, what sales of mortgages would be-at the aggregate level-but that did not translate down to a target, at the branch level, by particular product. In fact, we were very careful about that. One of the interesting things when we took over HBOS was that its sales incentives were much more product-specific. It had what were called baskets-five different baskets, which related to different product types, unsecured lending being one and mortgages perhaps another, I cannot remember exactly. That is not something that we had in Lloyds. I do not know when it was removed-it may have existed a long time ago-but certainly in my tenure I do not believe that we had anything of that type.

At the individual branch level, all the branch had was an overall sales target, but not any kind of indication, necessarily, where that would come from. What we very much emphasised was the importance of selling to customer need. I think it is reasonable that there should be a sales target, because what we knew was that there were a lot of unmet customer needs out there.

Q620 Mark Garnier: With customer need, you would make an assessment at a group level, would you not?

Helen Weir: At the group level, we would do it more in terms of what the expectations of the market were going to be, in terms of market growth. At an individual customer level, or an individual branch level, it was much more related to what the customers who came in needed.

Q621 Mark Garnier: The key thing that we are looking for, for this Banking Commission, is the tone from the top. What I am trying to get a flavour of is the tone that you were setting. I am absolutely assured of your integrity in terms of what you are saying, but how does that translate down to someone at a branch level? From what you are saying to me-if you think this hypothesis is wrong, please say-if you say, "Look, we think that this particular area of business is likely to grow by 20% next year", therefore you make a fairly reasonable allocation in your management accounts for the subsequent year that you will see 20% growth. You then turn round to the retail division and say, "Look, this is what we have come up with, this is how we think it will work." Come six months down the line, if you have a branch that has only, for example, seen a 5% increase in a product area that is expected to grow by 20%, surely that branch will feel that it has got something wrong and it will concentrate more on selling what has now become an underperforming product.

Helen Weir: Branches would not necessarily see that they were underperforming in a particular product area.

Q622 Mark Garnier: So you do not share the predictions with your regions?

Helen Weir: No, because that was done at the aggregate level. What individual branches got were broadly, as I recall, that this was the absolute level of sales that we expect you to make from this branch. What they would typically do is reference back to the previous year, because branches are obviously located within a particular customer demographic and those customers tend to have particular needs. For instance, if you are in an area with an older population, you will perhaps have less need for unsecured credit and a greater need for investment advice. Typically, the way in which branches would think about how they would achieve their sales targets was by reference to the sort of sales levels they had achieved the year before.

Q623 Mark Garnier: My final question. With the benefit of hindsight and having looked back at all that was going on, can you absolutely, categorically, with your hand on your heart say that the message you were delivering from the top could not be misconstrued as being sales targets?

Helen Weir: Absolutely. The message I was giving from the top could not be misconstrued as being sales targets. However, clearly we have a very bad situation here, and as a head of the retail bank, which is where I would have been talking to the branch network-obviously, I came in only in 2008-and looking back over the entirety of the period we are looking at, the fact that the sales incentive and the profitability of the PPI product was high meant that the incentives associated with selling it, certainly in the pre-regular premium period, were high. We put in place a lot of checks and balances to try to make sure that mis-selling was not taking place and that undue pressure was not being placed on customers. All the messages from the top were very much around that. However, I think in retrospect-for me one of the lessons going forward-is that if you have to put in place all those checks and balances, perhaps one should go back and examine the initial situation. Certainly, when we moved to regular premium, the profitability of the product went down, and therefore the incentive that attached to it went down. That is certainly something I take away from it.

Something we had in place in the branch was called a Tealeaf report, which basically meant that if you went through the eligibility page too quickly-we could monitor that because it was part of our system-it would be reported as part of our risk gateway. We went to great lengths to try to put in the checks and balances, but I think with hindsight, it would have been better to address some of the incentives. I am not saying that incentives had no part to play in the crisis that we are now looking at. Absolutely not. But that is what I would take from it.

Q624 Chair: Just for the record, in relation to the last question, Mr Loney, the Harrisons in July 2003 took out a loan of £46,000. From the record, it seems that you started back as the managing director in 2003. What month did you start back?

Phil Loney: October.

Q625 Chair: And you left in October 2011.

Phil Loney: I left the Group in October 2011. I stopped running the general insurance business in early 2010.

Q626 Chair: Most of the discussion about this would have taken place while you were in Lloyds?

Phil Loney: Absolutely. There were some instances in Black Horse when I came into the job where they were selling single premium on very long-term loans. As soon as we had finished the relaunch of the main loan protection products for retail- Black Horse was not in retail-we then turned to Black Horse and put monthly products in, which were much more suitable for those kinds of longer-term loans. That is the piece that I-

Q627 Chair: Okay. That is just for the record.

Q628 Mr Love: I want to come back to incentive schemes, and go through what was in them. But first, perhaps I could ask who was responsible. It sounds, Ms Weir, as though you were responsible for incentive schemes. I want to know what process you went through, and how you signed off incentive schemes.

Helen Weir: I actually spent quite a lot of time looking at our incentive schemes from the time I took over responsibility for the retail bank, which was from the end of April 2008. Recognising the importance of schemes, we spent a lot of time looking at the design of the schemes to ensure as best we could that they would drive the right kind of behaviour that was consistent with our strategy. We wanted to be a long-term-relationship bank. We wanted to be the bank that most customers recommended, and that is what all our customer advisers, if you had asked them, would have said we were about. That is why, for example, NPS was very important.

In 2008, I looked at the incentive schemes. We changed them as we went into 2009, which was the first point at which they would be changed. Obviously, part of the move to a regular premium meant that the emphasis on or the proportion allocated to PPI was significantly reduced.

We also-again, this is to the best of my recollection-introduced a service element into the incentive scheme at that point.

Q629 Mr Love: So up until that point, it had been purely on sales?

Helen Weir: They were primarily on sales. There was a separate service component up until that point, which went to a subset of the branch staff. What we did was expand that across the whole of the branch staff at that particular point-something called "net promoter score". I think each branch had between 40 and 60 measures a month. The other thing we also had the branches do was direct customer feedback, which was, having gone out and got customers’ views-

Q630 Mr Love: I want to come on to that. Let me stick with what was in the incentive scheme. You are saying that up until 2007-

Helen Weir: 2008.

Mr Love: You are saying that up until 2008, it was mainly sales-based, and then it began to recognise customer satisfaction. You mentioned earlier in a reply that when you went into a branch, there would be a board up on the wall. Would you accept that the primary focus of the staff in branches was sales targets?

Helen Weir: I think it would vary a bit across different people in the branch. Our front-line cashiers were very focused on customer service. I think the personal banking managers would be more focused, as you say, on sales levels-it was part of their job-but I would say that that was in terms of meeting customer needs, which was absolutely the focus. As we introduced service, it was made very clear to them that that was a very key part of what they were accountable for as well.

Q631 Mr Love: You mentioned earlier-this has come up several times-that there were no targets for any particular products. But we have come across evidence from other banks that the incentivisation to include PPI alongside a loan or a credit card was significant. Was there, in the incentive scheme, a specific provision to include more points-if I can call them that, because different schemes will do it in different ways-for including PPI in a sale?

Helen Weir: The number of points that was attributed to PPI was higher than it was for some other products. The points allocation across all products was somewhat related to profitability. That was a factor in the number of points as well as the opportunity. Therefore I think what you say is true, but that was one of the reasons why we recognised that the risk of mis-selling was there and put in place all the checks and balances that we have already described.

Q632 Mr Love: How much priority was given to penetration? You say that there were no targets. How much focus was on that? Were staff alerted to the fact that the penetration rates may not have been as high as it would be expected to be?

Helen Weir: Typically, the reverse would be true. If a colleague had a penetration rate that was too high, they were aware that that was one of the risk gateway measures that we would make. In terms of underperformance in penetration, typically what you would find are not issues with penetration of PPI, but you might find a personal banking manager who overall was not meeting the level of sales targets their colleagues were, in which case there might be an issue with their ability to assess customer needs and talk to them about the products that we had available. But there was nothing that was linked to PPI penetration that I am aware of in the branches.

Q633 Mr Love: Let me ask you about the percentage of the overall salary that was the bonus element. In other banks-correct me if this does not apply to Lloyds-it was somewhere between 15% and 20% for sales staff in the branches, and it went up significantly for branch managers and regional officials-middle management. Could you confirm how the bonus structure worked at different levels within the organisation?

Helen Weir: To the best of my recollection-and I can speak only from 2008 onwards-most of the people working in Lloyds branches and involved in selling would typically have a base salary of perhaps £20,000. Their typical bonus would be as you suggest: between 10% and 20% on that. I am very sorry, but I do not remember the absolute levels for the branch manager, but it would be higher as a percentage of their base salary.

Q634 Mr Love: It would become higher the further up they went.

Helen Weir: It would be higher. I do not think that you would be going from 20% to 100%-it would maybe be 30% or 40%. Those are typical numbers.

Carol Sergeant: We had very explicit conversations, because we wanted people to be able to rely on their basic pay. We did not ever want anyone to have to stretch for a commission or bonus payment for their daily outgoings. The more junior the level in the bank, the higher the level of fixed pay. That was a very explicit consideration. If we felt that those people were being under-remunerated, the way to address that was by getting the right mix between base pay and any kind of commission. That was a very conscious discussion. We used to talk about making sure that people had the right amount of money to meet their basic needs and so that they were not having to rely on a commission at any level in the organisation. So the further down you go, obviously the higher level of base pay you give people to meet that criteria.

Helen Weir: Can I also say that, for the branch manager, other factors would be taken into consideration? Their bonus would be more broadly based, but it would also include sales and service.

Q635 Mr Love: The point I want to make that arises from this is that both the branch manager and successive layers of middle management would be asked to ensure compliance with the sales process, yet they were significantly incentivised and remunerated-30%, 40% or 50% of their salaries. Is that not a hopeless conflict of interest in ensuring that the sales process was carried out properly?

Helen Weir: I recognise that they had a role to play as part of the first line of defence. The first point I would make is the one I was just making, which is that, actually, their performance bonus would be based on things beyond just sales. They would have service and risk components as well. That was an important aspect. Secondly, independent assessments of the quality of sales were taking place at the same time. The information was not limited to the line-the branch manager, regional director and so forth. There were independent risks teams in each of the areas and regions of the bank, which would also be reviewing the data in terms of the quality performance, the Tealeaf report that I previously referred to, things such as penetration levels and so forth. So all the information that was being given to the branch manager was available to this second line. Equally, they would also be doing file reviews and customer contact exercises where the risk indicators showed that there may have been the possibility of mis-selling. So there would be a thorough second line that was overseeing what you are describing.

Q636 Mr Love: I listened very carefully earlier on, because I wanted to ask you how you knew that mis-selling was not taking place. Clearly, at the end of Mr Phillips’s questions, you all accepted that massive mis-selling was taking place. Going back to how you tried to insure yourselves on mis-selling, you mentioned risk reporting, interviews carried out at branches, telephone conversations and complaints monitoring, but did you include, for example, mystery shopping as a mechanism? You seem to be very critical of the FSA’s mystery shops-and, I suspect, of Which? and other organisations that use mystery shopping-but did you ever think that that might be an appropriate way to find out whether mis-selling was taking place?

Helen Weir: We did consider mystery shops and we did conduct our own, to a limited extent. One of the issues with mystery shopping in this space is that if the mystery shopper goes through the sales process, they get a credit record, which potentially could disadvantage them were they privately to apply for credit. So mystery shopping in this space is not actually easy. We did do some, and we were generally satisfied with the results. If it turned up a situation where there were issues, we would go back and remediate those, but I must say that it was a relatively limited exercise because of the challenge that I referred to.

Carol Sergeant: Perhaps I could just explain, because we did not understand the feedback that we were getting from the FSA mystery shops, which was possibly our fault. For virtually all the loans, and therefore the PPI that we sold, we talked about franchised customers. You had to be a Lloyds TSB customer even to get into the process, and the way that that process worked was that, because you were already a Lloyds TSB customer, we already had a lot of data about you. So, when you went through the sales process-when you decided whether or not this was appropriate-you would populate that with pre-existing data, go through it and say to the customer, "You still live here, have this job, earn this much and have x dependants," and so on.

The problem with mystery shopping was that it was A.N. Other walking into a branch and they were not a Lloyds customer, so all they had were very general conversations-they did not get into the process where we decided on needs, suitability and eligibility. We did not understand that, so, when we explained that to the FSA, that explained why the results were so different from what we would have expected-because they did not go through the process.

Helen Weir: Perhaps I can pick up on the point that you are making, which is: how, when you have got all these checks in place, as I understand it, do you still have this big problem today? If all these checks were effective, why have we got the big mis-selling issue that we are looking into today? That is an important question. The fact, which comes back to my responses to Mr Phillips earlier, is that some of the standards that have subsequently been recognised as being required to be linked into the principles were not ones that we necessarily had in place. For instance, the sale of a loan to someone who might cancel it during that period was not part of our risk assessment process because, wrongly, we had not understood, through the conversations that we had with regulators and our observation of best practice, that that was a requirement. That was why all those risk mechanisms did not pick that up.

Q637 Mr Love: Can I put to you another reason? The reason why mystery shopping may have been more important than was assumed at the time was that all these broad measures that you have talked about are really customer satisfaction measures, and customer satisfaction did not tell us whether mis-selling was taking place. Do you accept that?

Helen Weir: That is an important point. We never believed that customer satisfaction alone was an adequate measure of absence of mis-selling; we recognise that customers could be satisfied even when, potentially, they had been mis-sold to. We were not, I think, placing undue reliance on that as a particular measure. That was why we had all the objective checks in the process.

Carol Sergeant: If I could just add to that, customer satisfaction was an important commercial measure, because, if you are a bank, you want to make sure that your customers are satisfied. Customer satisfaction was never, ever a part of any of the risk tests. I agree with you completely: you look at complaints, uphold rates and all that stuff. You look at files and you check conversations, and mystery shopping is an important part of that, absolutely. I agree with you.

Q638 Mr Love: Are you telling me that the risk measures that you put in place reflected whether a sale was proper or a mis-sale?

Carol Sergeant: Customer satisfaction was not included because the customer, as you rightly say, can have a wonderful experience when they buy a product, but that does not mean that it is the right product. We looked at mystery shops, we checked files and we used to call back customers, and that happened at lots of different levels. A customer would be called and asked, "Did you understand what you bought? Were you asked these questions? Did you get clear guidance? Were you given the right documentation at the right time?" The system prompted a lot of that. You could not proceed to the next stage unless you had done this, that and the other, and it would often cut off if you had not done it right. None the less, we had specific customer follow-up, complaints data, and information about things like abandoned sales-a whole load of measures-because what you are trying to measure here is the quality of a face-to-face event. It is a very different thing from what you are trying to do in credit, so you have a whole load of proxy measures around that that build up a picture of whether this is working or not. Mystery shopping, I agree with you completely, is a very important part of a whole set of measures.

Q639 Mr Love: The first group of measures depended on customers understanding the process and the sale that had been made. If that was not the case, the whole thing falls apart. We now accept, with hindsight, that that was the case. What I am trying to get at is how much you realised that that was the case at the time. In other words, I am looking to whether these processes might not actually pick up the mis-selling that was going on.

Carol Sergeant: Nothing is ever 100%, so you never assume that you are 100% right. At the time, we thought that they were picking up the key issues not only generically, but specifically, when you phoned up a customer and said, "What did the adviser do? Did they take you through this? Did they take you through that? Did they give you this information?" and so on. At the time, we believed that these things were being picked up, and some issues were picked up. As Helen mentioned, we would then go away and follow them up. There was the telephony issue and several issues that came up. We would deal with that particular customer and then we would go and look at who else could have been affected by the issue. We would go back and ask them. Interestingly, on one occasion when we went back and asked people, very few people actually wanted to change what they had been given-I think it was about 1%. None the less, we went back whenever we thought there was an issue.

Q640 Mr Love: I want finally to focus on the culture in the bank branches during this time and on surveys carried out by the bank unions. I accept that this may be a different union from that involved in Lloyds TSB, but I think that the overall approach taken is one that we should question you about.

The first question is about management pressure, and we have talked about the different incentive structures for bank managers and regional officials, and about the pressure being intense. There was also what was called the threat of personal improvement plans. If I may say so, Ms Sergeant, you mentioned earlier that some people would be subject to "retraining", which sounds awfully like a personal improvement plan. Do you accept that the culture that existed in bank branches during this period was intensely negative and allowed the levels of mis-selling to go ahead?

Carol Sergeant: The retraining that I was talking about was when people did not meet their risk tests. There was this risk gateway, and if you failed that, you had to be retrained.

Mr Love: I accept that.

Carol Sergeant: Just to be clear, that is the retraining that I was referring to. That is the retraining that I looked at. That is data that I looked at to ensure that there actually were enough people not getting through this gateway, because otherwise there is no point in having one. I also looked at what happened to them when they did not get through the gateway. To be honest, not everybody likes to be retrained, particularly when they have been found not to meet a minimum standard. In many ways, that is more annoying for them than if they did not do a sale properly. They do not like it, but that is the way that the world is, and if they do not meet the minimum standard, they have to get to that minimum standard or they get removed to another position. In extreme cases, they could be removed from the organisation.

Q641 Mr Love: The question is whether that minimum standard was mainly or solely based on sales targets that they had to reach individually.

Carol Sergeant: No. What I am talking about is nothing to do with sales targets. I mentioned the risk gateway. That is about the data that have come through on complaints and rates of people who cancel their policy quickly, and whether they have undertaken all the training and whether they did it to an adequate level. There were also regular tests for these people-it was not just training. They had to undergo regular product tests and all kinds of things to ensure that they were still up to speed. All of that was nothing to do with sales. It was all to do with whether employees were doing all the basic training, whether they had the risk stuff and whether people were complaining about them. What I was talking about was nothing at all to do with sales.

Q642 Mr Love: Ms Weir, you indicated right at the beginning that you spent one or two days a month in branches, going around and seeing things for yourself. Did you not at any time feel that there was an oppressive pressure at a branch level to meet these incentive targets, to which the management was wholly, if unreasonably, committed, and that these personal improvement plans-by whatever you name you call them-suggesting that people were not doing their job properly if they did not meet sales targets were inimical to a proper sales process and led to the massive mis-selling that we have seen?

Helen Weir: What I found when I went out to branches were people who wanted to do the right thing. Branch colleagues were very focused on customer needs; these were people they lived with. They were also very focused on things such as service measure and so forth.

I do recognise the risk that you are raising. From my experience, I would not describe it as oppressive. I think that people were clear that if the sales that they were making were not acceptable-and we used to monitor this through cancellation rates and so on-that was much more serious than not making any sales targets. It was quite typical in a branch to have some people who did meet targets and some who did not. What was a no-no was not hitting your risk measures.

Q643 Mr Love: We have been told by the trade unions that people working in the branches sold PPI products to themselves in order to meet sales targets. Were you aware of that?

Helen Weir: I was not aware of that.

Phil Loney: Never. I never came across that.

Q644 Lord Turnbull: If you take the first decade of this century, you can divide it into two. During the first five years up to 2005, there is a growing grumbling within the consumer community with Which? and people like that. In 2005, things change, and we have the super-complaint and the first of the FSA’s thematic reviews. This whole business is then not resolved until 2010, so why did it take five years to resolve this?

One explanation you have given-I have to say that I find it completely unconvincing-is that there was a debate between you and the FSA, where you thought it was moving the goalposts by moving from rules to principles. I would submit that what was going on was that facts were accumulating on the ground and you were ignoring them. The reason the FSA was putting on more pressure was not this theological argument between the regulated and the regulator, but because evidence was growing that this was a bad product, badly sold.

Carol Sergeant: I will come back to what I might do differently. This was a product that had been around for decades. The statistics only go back so far. Throughout that period, two issues were being raised. Mainly it was pricing and competition that was being raised in the early days, not mis-selling.

There was a belief on all parts-FSA and industry-which, with the benefit of hindsight, has turned out not to be correct, that there were issues but they could be fixed. That was the belief and the basis on which the FSA was doing its thematic reviews, and we thought that we were rising to the challenge at every point. Even the FSA’s final statement that came out before the end of the process was, "We have now mended the market." I think we should have realised much sooner that this perhaps was not mendable. The true belief at the time was that this was mendable. If the FSA and others had not believed that, the market would have been stopped.

It was always, "Let’s do this. Let’s do that. Let’s do the other." That is not a good or pretty explanation, but that is how it felt at the time. It was felt, "We can repair this. Whatever it is people don’t like about it, we can repair it and we are all working hard to do so." With the benefit of hindsight, it looks that maybe it could not have been repaired, and we should have just shut down much sooner. If I have one regret, it is that I did not see that sooner and that we did not get out of that market sooner.

Q645 Lord Turnbull: Thank you for that acknowledgement.

You, in particular, have tried to portray the view that the emphasis was on the sales process, but if you go to the Lloyds Banking Group submission-I think this is on pages 20 to 21-it starts off with the first thematic review on one page, and then the second thematic review and so on. If you look at the first thematic review, you already have got the question of inappropriate sales-it might be selling to the wrong people. By the second thematic review, the tone-far from being better-is getting worse: "Failing to inform customers of the true costs of the policy…communication…to customers, resulting in the purchase of products customers may not be able to use". This is 2006, so this is not simply about an argument between two groups of professionals; this is about real people and real products.

Then you have the third thematic review, which is not much covered in the Lloyds paper. I don’t know whether you have seen the FSA’s submission-it is on our website, as SJ013. There, far from saying things are getting better, the FSA claims-and it had a mystery shopping exercise that seems to have been a great deal more successful than yours and that came to different conclusions-that there is "little or no improvement in the disclosure to customers of price and policy details…Around a third of the firms visited and less than half of firms in the mystery shopping…failed to ensure that customers were given the basic information necessary to make an informed decision about the product…Many of the PPI products did not appear to be designed to meet the needs of the customers to whom they were sold". This is 2007, and that was what Which? and the consumer world were telling you, and you are still representing this as an argument about principles versus rules. That is why I don’t think this explanation works.

Carol Sergeant: I am not portraying this as an argument, although I do have some views on principles versus rules. We were not asked to stop selling this product; we were not given specific instructions. With the benefit of hindsight, my advice to anybody would be that as soon as the regulator starts the slightest grumble, get out of that market. There are consequences about that, more generally, for market.

It is not that we were not trying to address all these issues. Some of the issues would emerge in every thematic review that came out. There was the most enormous exercise in the company: "Goodness me! Have we done that? How good are we at this and how good are we at the other?" That was why we had so many external experts running around, as well as the FSA. Because we were the largest player, the FSA-quite rightly-was in our business the whole time, either through a thematic review, supervision or whatever. Every time one of these things came out, we had a huge, "Let’s see how we’re doing this right." As I say, with the benefit of hindsight, it looks to me now like this never could have been right, and everybody bears accountability for not calling that sooner.

Q646 Lord Turnbull: It gets worse, because this matter goes to the OFT; it is referred to the Competition Commission; and the Competition Commission produces its view that the claims rate as a proportion of premium is between 15% and 20%. Then someone-I presume that it is one of the three of you-must have been part of the BBA’s decision, against the advice of peers and its director general, to proceed with this judicial review. This does not reveal an industry and its largest player thinking, "We’re on a loser here." By this time, you were losing 80% of the FOS appeals, and yet you still-sticking on this narrow point-take this thing to judicial review. I cannot understand why you didn’t see-going beyond the theology and the legalese of it-what was really happening and what was the customer experience. Presumably, someone in your organisation-it could have been one of you three-went to the BBA meeting and voted for going ahead with a judicial review.

Helen Weir: Perhaps I should talk to that because I was a member of the BBA retail committee at the time that you are talking about. Perhaps I can talk a little bit about what happened in the backdrop to that. As I think Angela mentioned in her evidence given here, a lot of effort went on from probably early 2009 until the JR time, to try and find a way through this, a resolution to this, in a way that would meet the concerns that were being raised by the FSA.

We had extensive conversations, both from a BBA point of view and from a Lloyds point of view bilaterally with the FSA to see whether we could find a way through and resolve this. However, those failed, and that is not for want of effort. I would say a lot of time was invested in trying to find a way through that would satisfy both the regulators and also do the right thing for customers. We offered back-book reviews and various other things during this period, but the FSA decided they wanted to go ahead with the complaints-handling approach that they subsequently released.

The background to the JR was actually more about principles and frankly PPI was the last area that we would have wanted to have done this on, and that was a conversation that Angela and I had. However, a number of banks felt quite strongly that actually what we were doing was having a retroactive interpretation of what the standards that were in place at a particular time were, and that that was not appropriate; and that that was the basis of the challenge; and this was absolutely not about PPI. In fact we regret it, and I share Angela’s view that this was not where we wanted to be. We really absolutely did not; but we did believe at the time that although the principles had been in place, the way in which those were being interpreted-and particularly through the DISP requirements-was a retroactive interpretation of those principles; and that was the basis of the challenge.

Q647 Lord Turnbull: But those principles, as Mr Phillips said, have been in place since the FSA was created. There has not been any retrospection. No one changed the principles. They had been there from the start.

Helen Weir: No, but I think our interpretation, as with any industry, as in accounting: your interpretation of the principles is based on a number of pieces of information, one of which is conversations with the regulators-the people who are interpreting them. The view that the industry held-and every single bank who went into the JR had, as I understand it, that decision approved at board level-was that the way in which the principles were being now interpreted by the FSA was not consistent with the conversations and ongoing dialogue we had had over a period of time.

Q648 Lord Turnbull: The FSA was changing its ground because the facts were accumulating and we were getting a better understanding of PPI. The figure of the claims as a proportion of premiums had emerged. Now, Mr Loney, it’s said in the old adage, "If the left don’t get you then the right one will." If you say that the products were correctly sold, with the right people, but they were expensive-boy, were they expensive-if you believe that, I don’t, because I think the product was faulty. What it is, I would say, is a cynical exploitation of asymmetry in information. You had a good idea what the claims rate was going to be and the customer didn’t. No one seemed to ask what I would call the Nick Leeson question: is this too good to be true? Can this really be a fair contract, where one side has so much more information than the other?

Phil Loney: I don’t think the customer was ever presented with just the PPI in isolation. What the customer was presented with was the loan and the rate of interest on the loan, and the PPI to protect it. The reality is that the customer made a decision, which was, "Does that combination look like good value to me?". That is also how we looked at the profitability of this category of business, which was really quite modest.

Q649 Lord Turnbull: Very often this thing was mandatory. No one was told just how much it cost. No one was told they could go somewhere else to buy it. That all looks like a combination of inertia and asymmetry of information.

Phil Loney: It was not mandatory at all. It was optional, and quite large proportions of people chose not to take it. Some of those may have regretted it later if they then had a claimable event and they had not got any kind of cover.

Q650 Chair: Can I intervene for a second? Which? has sent us evidence saying that during the mystery shopping that they conducted in 2004, in all three calls to a Lloyds TSB, PPI was automatically included, and in all three calls the sales person did not mention that PPI was included when providing the quote. If the branch, as you say, was communicating that this insurance was optional, why were they automatically including it when consumers phoned up to ask for a quote? Or is Which? wrong on this issue?

Phil Loney: All I can say to you is that our product was optional. Our approach to selling was optional. If that is what Which? found, that should not have been the case. PPI was optional and we actually called it optional loan protection insurance to support that.

Q651 Lord Turnbull: My final point is have you realised just what a disaster this has been? That is not just reputationally: if Lloyds are paying back about £6 billion, for the industry as a whole it must be £15 billion. That is way in excess of anyone’s estimate of the consumer detriment. You had a cross-sold, cross-subsidised product. The cross-subsidised PPI part of it was substantially mis-sold, so that is being paid back, but you are not getting back the subsidy on the loan. So this commercial judgment of selling in a cross-subsidised way has proved to be catastrophic.

Phil Loney: It has. That analysis is right. There is an even bigger picture than that: if you look now across protection products-if you just stand back and look at the degree of underinsurance in the market-nobody feels like they can sell protection products with any sense of certainty. I am working at a Life insurance company now, which does not have its own distribution. The selling is almost entirely through independent financial advisers to the better-off people in our society, whom they tend to service. For both protection products and investment products, you are seeing banks, which we need in social terms to be reliable providers of good quality products to their customers, withdrawing from that space, because they have had this experience and do not believe that they can meet the standards as they stand. That is an even bigger tragedy, because the reality is that all of that under-provision ends up in the welfare state.

Carol Sergeant: There is definitely an issue in this industry-and maybe others, which I know less about-about cross-subsidisation. We have seen it with overdrafts, and we have seen it here. As I am sure you well know, free in-credit current accounts do not come free. They have to be paid for in other ways. One of the things that all of us-and I include the industry in that as well as the authorities, as I have been on both sides-need to think much harder about is how we deal with these issues. For a long period of time, cross-subsidisation appears, anyway, to be acceptable to society. There is then a big move, and that changes. We need to have an explicit conversation about that, because if you remove a cross-subsidy there are winners and losers. The whole current account debate is in that space. It will be very interesting to have a more explicit conversation about what kind of cross-subsidisation is acceptable or not, and maybe to do that at regular intervals, so that we do not end up in a "boiled frog" situation.

I feel that it is quite a substantial issue lurking behind all of this. It has been previously, in banking. Even the Vickers and Liikanen recommendations were, to some extent, about retail and commercial banking not subsidising investment banking. I think it is a big issue. I have no clever solutions to offer, except that we need to think about it more ruthlessly before everybody starts, in different ways, getting very upset, because it then becomes much more difficult to have a rational debate.

Q652 Lord Turnbull: You are right, and it is one of the subjects we are looking at. In some areas-printers and cartridges are an example-we can accept that but is it abusive? The reason the answer was not satisfactory here is that some people were able to make claims and some people were not, so there was a kind of unfairness in the cross-subsidy. It was not simply one person getting the benefit; it was some people in that category getting the benefit and some people losing out. You are right on the wider issue, but that is probably enough. Thank you.

Q653 Mark Garnier: Carol Sergeant, on a couple of occasions you have mentioned that you have strong views on the debate between principles-based regulation and rules-based regulation. Do you want to expand on those now?

Carol Sergeant: There might be a few other things that you want to think about. Principles-based regulation is fine. I am a fan of principles-based regulation, but we need to consider carefully how it works in different circumstances and how it provides enough certainty on the execution of those principles. Some of the things that are around now are great-the early-intervention powers of the FCA are fantastic-but I am still not convinced that this is a situation where it could have worked. This was a product that had been around for a very long time, and presumably for a lot of that time people thought that the principles were working, and then societal attitudes changed.

I gave the example of gas boilers, but human rights law is a very good example. The law was codified in 1948, although people had actually been thinking about it long before that, yet until the mid-1970s you can meet all that and discriminate massively against women-I have felt that myself-and then it changes. It is still the same principle, but how the principle is executed and what it means in practice changes.

I do not have a clever answer, but there are lots of other similar areas. The British Standards Institution has principles and standards. Helen talked about the accounting profession. I think we made a mistake. I personally made a mistake, perhaps because I had been at the FSA. I thought, "Oh, yes, principles. We all understand how to operate to a principles-based regime." And, frankly, we did not. A lot of it is about having a principle, but what does society think that means? There were step changes, which is a good thing because it is improving all the time. I do not have an answer.

Q654 Mark Garnier: Is it not the job of the regulator to set the regulatory tone from the top?

Carol Sergeant: I do not think you can just say that it is the regulator, but there was a massive misunderstanding. Ultimately, it is for the regulator to decide, but it is where there is this kind of change slowly over a period of time. I criticise myself for not having spotted quickly enough where that was going and for thinking it was a question of mending, when actually it was a massive step change. I do not have a clever answer, but I have reflected on that. A lot of people are saying a lot of different things. Some people have been saying, "You cannot do principles in this type of regulation," and so on. I think it is deeper than that; it is a question of working out how you do it and having a really open conversation about that, a little bit like I was suggesting with cross-subsidisation. We all agree with the principle-nobody disagrees with the principle-but how do we actually do this in practice in a way that provides enough certainty for all the key stakeholders: customers, consumers, industry and society?

Q655 Mark Garnier: I agree with your analysis, but look at it from the other direction, so starting from a rules-based regulation, if we were to go down that route. Do you not accept that you are then devolving any imagination or any sense of responsibility simply to a rule book, and therefore the people in charge of your organisation-

Carol Sergeant: I am not a proponent of rules-based regulation at all, in any shape or form. It is not my background. It is not where I have come from. I am simply saying that if you have a principles-based approach, which I wholeheartedly support, we perhaps all need to be a little more thoughtful about how that works in particular sectors and how we deal with the societal changes, which are a good thing. I am jolly pleased we have equal rights legislation in the UK now, but you have to work out how you do that, and I am not sure that that has been completely resolved yet. I hear the debate-rules versus principles-and I think the right answer is somewhere in the middle, but I am not sure even now that there is enough clear understanding about where that is and how it should work. I just mention it because I have heard the debate so much.

Mark Garnier: Presumably, you would accept-this is my final point, which I am sure you will agree with-that something like the liquidity requirements for a bank have to be a rules-based regulation in terms of capital ratios, whereas treating customers fairly is one of those slightly difficult ones.

Carol Sergeant: I would not take that view for liquidity either, because you can have all kinds of rules about liquidity, but the key thing about liquidity is the degree of confidence the market has. It is all about confidence, so there are lots of other things you need to do: managing your communications carefully; sourcing your liquidity from as many different sources as you can-countries, individuals, companies and a whole lot of different types of instruments and different markets. A lot of that stuff cannot be codified in rules, or you would have such a complex set of rules that nobody would know what the hell they were doing on a Tuesday morning. I think that applies everywhere, and in capital as well. You have capital ratios, but how good are people’s risk models? How good are people’s processes? It applies all over the place and I think some other parts, because they are frankly possibly more mature, have found a way of dealing with that. I am not making an excuse. I wish I had followed the lead of the non-executive director who did raise it way back in 2006 with the FSA, and we never pursued it, and I wish we had.

Q656 Rory Phillips: Who was that? Sorry to interrupt.

Carol Sergeant: Do I have to name him? He is a great fellow. He was the chairman of the audit committee.

Q657 Rory Phillips: A non-executive director of Lloyds.

Carol Sergeant: Yes. Chairman of the audit committee, and I went with him because, quite rightly, the FSA wants to see the chairmen of audit committees, and on that occasion I was with him for part of the meeting and I remember him saying it.

Q658 Rory Phillips: And what was the result of that initiative, if you don’t mind me asking?

Carol Sergeant: It was not really an initiative; it was a regular conversation the FSA has with the chairmen of audit committees. As part of that conversation, he just raised it as an issue, because we had been talking about it internally.

Q659 Rory Phillips: So I can understand, do you mean this precise point about principles versus rules?

Carol Sergeant: Yes.

Q660 Rory Phillips: Raised as early as 2006.

Carol Sergeant: He raised it, but people raise lots of things with the FSA. It was not a big initiative; it was a part of a routine conversation, so I do not want to say, "Oh, we raised it and people ignored it."-no, not at all.

Q661 Rory Phillips: Did he raise it within the board?

Carol Sergeant: Yes. I think it was discussed at the board, actually.

Q662 Rory Phillips: At that time in 2006?

Carol Sergeant: I do not know. He must have reported back to the board on his conversation with the FSA. Whether he mentioned this, I cannot remember.

Q663 Rory Phillips: What was the result within the board? Can you remember? Ms Weir?

Helen Weir: No.

Carol Sergeant: I was not there. I was not a board member. I would imagine-I am not trying to be awkward. I do not know whether he raised it in the board, but certainly in the meeting I remember. I have been reminded, with all of this that has happened now, that he did raise it.

Q664 Lord Turnbull: What exactly was his suggestion as to what alternative course might be found?

Carol Sergeant: I do not think he had a suggestion. I do not think it is something that has a quick fix. I think it is something we need to think about. I do not have a quick fix. As I recall it, it was simply raising, how was this going to work between principles and rules?

Q665 Rory Phillips: It sounds as though the reason you brought it up is because there was this shaft of light. Somebody, five years in advance of what actually went very badly wrong for you in April 2011, had understood the problem. What happened to the understanding in the next five years?

Carol Sergeant: The truth is I think quite a few of us were concerned about how it would work, but we thought, "Well, we’ll work it out together. We’re on this journey and we’re going to work it out together." We liked the idea of principles-based regulations, so we did not want to shoot that out of the water. We all felt that we could work it out as we went along. That was the spirit behind a lot of what went on. We are all learning together what this means in practice.

Q666 Chair: Who did you speak to at the FSA?

Carol Sergeant: I cannot remember. I don’t want to make too much of it. It was a passing remark.

Q667 Chair: Presumably, you saw board minutes from Lloyds?

Carol Sergeant: I think I saw board minutes. I am not sure I read them all.

Q668 Chair: Was this minuted?

Carol Sergeant: I don’t know.

Rory Phillips: It looks as though it is in one of the minutes that have been disclosed to us. You went with him-I am not going to name him-on 6 April 2006 at which he, the non-executive, had drawn attention particularly to the concerns of the directors regarding the lack of minimum standards for "treating customers fairly in the FSA’s handling of the payment protection issue." So it sounds as though he in fact was absolutely on the point, as it emerged in 2011.

Carol Sergeant: Yes.

Q669 Rory Phillips: The question therefore for the panel is why, in the five years, nobody else at Lloyds was so acutely on the point.10

Carol Sergeant: I think we were. It was an issue for us. We were hoping we could work it out. As I say, we did not want to throw principles out and we were just getting on with doing whatever we thought was necessary to do to meet those principles.

Rory Phillips: While selling many, many hundreds of thousands of policies.

Q670 Chair: Helen, you mentioned about Angela Knight in relation to Lord Turnbull. Angela Knight said to us-you will know this from the record-that her five years with the BBA were the most uncomfortable of her life. She said that she thought of resigning. Given that you said you share her views that this was not where you wanted to be on the judicial review, did you agree with her that this judicial review should not have been pursued?

Helen Weir: I agreed with her that to do it on PPI was not where we wanted to examine this particular issue, which from our perspective was about retrospective interpretation of the principles. I absolutely agreed with that. However, very reluctantly I came to the conclusion that there was little alternative because this was the particular issue that was coming up at this point. Had there been any other, as we saw it, course of action at Lloyds-I discussed this with Angela: she and I were both in the same place on this point-both unilaterally and as part of the BBA retail committee, we attempted to find other ways through to address this issue as we saw it, which was around principles and retrospection, not around PPI-it genuinely wasn’t about PPI-

Q671 Chair: So maybe we could get this correct for the record. It was not a case of other banks pushing Angela on this and Lloyds had a negative view of pursuing the judicial review, it was the environment in which you were operating and you reluctantly all went ahead to pursue the judicial review.

Helen Weir: Some banks felt more strongly than others that this was the right way to go. That is one of the reasons why Lloyds and possibly one other bank tried to see whether there was another approach. Not all banks engaged in those bilaterals or trilaterals with the FSA. We were really keen to see whether we could find a way through, working co-operatively with the regulator. As Carol said earlier, being in court with your regulator is absolutely not where anyone in the industry would want to be.

Q672 Chair: Are any of you aware of any of your shareholders ever raising concerns about the bank’s PPI practices?

Helen Weir: I would probably have met most often with shareholders doing my period as finance director from 2004 to 2008. I cannot recall that being raised.

Q673 Chair: On the bonus clawback, Anthony Watson, the chair of your remuneration committee, appeared before the Treasury Committee. You are probably aware of the minute from that. A question arising from that is why the chair of the remuneration committee was only aware of the bonuses in February 2011, given that the FSA published its policy statement in August 2010. In other words, why did it take six months for the possible size of the provision to be communicated to the chair of the remuneration committee?

Helen Weir: I cannot answer that question at all. We had communicated all the way through, as far as I am aware-I am sure of it-when we were considering the JR. The size of the potential impact-or the retrospective activity-was made known, certainly at the executive committee and at the board.

Q674 Chair: I quote directly from Anthony Watson, who said, in his evidence to the Treasury Committee: "Had we known at the time what we subsequently learned, we would not have set the bonuses at that particular level."

Helen Weir: My interpretation of that would relate to the outcome of the judicial review. The absolute level of compensation that could potentially be paid out, based on the FSA interpretation of the principles, was made clear to the board. In fact, a number that is much larger than the number currently in the domain was always flagged as a possibility.

Q675 Chair: But does the fact that your bonus was clawed back subsequently send out the right signals to the market? I do not know if it is a matter of public record how much of your bonus was clawed back, so I will not read it out. I do not know if that is private information. Was that made public?

Helen Weir: Yes.

Q676 Chair: It was made public? Yes-well, you had £218,000 of your £875,000 bonus clawed back.

Helen Weir: That is correct.

Q677 Chair: Maybe there would not have been a need for that if, first of all, Mr Watson had been informed at the right time.

Helen Weir: I am sorry, Chairman, but I am very clear that the board were aware of the potential outcome, were compensation paid back to customers over a long period of time for PPI sales-it was made clear at an earlier stage. I can only think that Mr Watson was referring to the likelihood of that outcome on the JR: i.e. had the JR outcome been known-

Q678 Chair: I don’t think so. However, it is a matter of record, and we will look at that.

Carol Sergeant: Can I help with that, Chairman? As chief risk officer, I had regular discussions, not only with my executive colleagues, but with the chairman of the remuneration committee. I actually had left the bank before any bonus was decided, but in the course of those early conversations, before any decisions had been taken, we would have, effectively, informal meetings of the remuneration committee, at which a number of other executives were present. To help the chairman of the remuneration committee begin to consider what his view on the bonuses would be, we would set out all the risks that needed to be taken into consideration and the risk performance-so that would be risk performance, but also inherent risks. Things like credit and the loan protection were inherent risks. I knew that he and the whole board were aware, as Helen says, of the range of possible outcomes, which, being the rather cautious lot we are, was pretty enormous-just to say, "This is the worst that could happen." I believe they were also aware-not that I was involved in it, but I made sure they were aware-of the legal advice, and that is quite clear. In terms of the point Helen makes, my understanding from what I read in the public domain, having then left the company, was that this was because the remuneration committee was uncertain about the outcome of the judicial review and therefore felt they could not make an adjustment.

Q679 Chair: Okay. Just for the record, Andrew Tyrie, the Chair, was asking Anthony Watson when he first became aware of the size of the PPI redress provision of over £3 billion that was announced on 5 May 2011. His answer was: "We became aware of that after, in I think about the February of 2011, and it came in two bits-the judicial review piece and something that we were going to do ourselves anyway, so it came out in the February and then it extended into the March. That was after we had settled on the bonuses for individuals, which then…became apparent that the bonuses that we had settled on for a number of the executive and executive directors were inappropriate." So for the record, that is, for us, important.

You have said that massive mis-selling has taken place. If you look at the recommendations of the Walker review, Walker said that the "principal deficiencies" in bank boards "related much more to patterns of behaviour than to organisations." Do you agree?

Helen Weir: I think it is very hard to talk in general, rather than in specifics, so I am not sure I could agree or disagree. I am sorry.

Q680 Chair: The reason I raise that is that, from your evidence, it seems-you can say whether this is unfair or not-that you, on all occasions, outsourced your ethics to the FSA; you talk about what the FSA said in regulations. If everything was okay, fine. If you could dance around it a bit, fine. But this was about the FSA. Isn’t there a need for a cultural and ethical change in banks that sell, where institutions that are bigger than the annual GDP of a country have to have their own stamp of culture and ethics?

Helen Weir: Absolutely. Let me comment on that. I will speak personally from my own experience and based on my own actions during the time. First, I would not say that I relied on the FSA as being our governor of ethics. I think I made it quite clear-I hope I made it clear in what I said earlier-that, yes, the rules were important, but one had to have regard, and I had regard, to the principles. In interpreting those principles, one would look to, and I looked to, things that the FSA were saying, to things that one was hearing from the external market and from your postbags as MPs, and to what was happening more broadly in the market. So there were a number a factors, as well as I what I thought was right for customers, given customer feedback, complaints and other issues. That is the first point I would make.

The second point is that if you look at all the actions, certainly that I took when I was leader of the retail bank and prior to that with my predecessors, our focus was on doing the right thing for customers, and we were very clear about that. To be Britain’s most recommended bank, you have to have the trust of customers. We were looking to deepen customer relationships. Now, as then, if you visited the branch network or the telephony centres in Lloyds, you would find a lot of people who are absolutely focused on wanting to do the right thing for customers, and who genuinely believe they do that.

Are there some things that can be improved? Clearly, there are. As I have said, I personally, and the industry as a whole, will learn lessons from what is a very sad period that I very much regret. But I am not sure I would therefore necessarily agree that, in terms of this wholesale change you are describing, there are not some core things there. Some things have clearly gone wrong-undoubtedly, some massive things have gone wrong-but I struggle to say that we or I approached this with a very unethical mindset, trying to get by with the minimum that was necessary; that certainly was not a mindset that I ever had.

Q681 Chair: I understand that. I am not saying that. What you are saying is that culture and ethics need to be elevated, which is good.

Helen Weir: That is absolutely critical.

Q682 Chair: My last question is very simple. Do you think the industry will be able to do this on its own, or will it need assistance from elsewhere?

Helen Weir: What I would say is I do not know that the industry, on its own, will do it. There are opportunities to bring in experience and insight from elsewhere. Working with the regulators and with legislators, and learning from other industries, perhaps stands the industry in the best stead.

Chair: Good. I think we have exhausted everything. We have kept you for over three hours, and we apologise for that, but your evidence has been very helpful. Thank you for your attendance.