UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 606-xxxv

HOUSE OF COMMONS

HOUSE OF LORDS

ORAL EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKDING STANDARDS

BANKING STANDARDS

MONDAY 11 FEBRUARY 2013

JOHNNY CAMERON, JOHN HOURICAN and PETER NIELSEN

SIR PHILIP HAMPTON and STEPHEN HESTER

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Parliamentary Commission on Banking Standards

on Monday 11 February 2013

Members present:

Mr Andrew Tyrie (Chair)

Mark Garnier

Baroness Kramer

Lord Lawson of Blaby

Mr Andrew Love

Mr Pat McFadden

Lord McFall of Alcluith

John Thurso

Lord Turnbull

The Archbishop of Canterbury and Rory Phillips QC also attended as Specialist Advisers with power to examine witnesses.

Examination of Witnesses

Witnesses: Johnny Cameron, former Chairman of Global Banking and Markets, RBS Group, John Hourican, Chief Executive Officer of Markets and International Banking, RBS Group and Peter Nielsen, Chief Executive Officer, Markets, RBS Group, examined.

Chair: Good afternoon. Thank you very much, all three of you, for coming to give evidence today. We are going to begin this session with some cross-examination by Rory Phillips, QC. After that, there will be an opportunity for colleagues to chip in with further questions.

Q3870 Rory Phillips: I will ask you all some questions about the manipulation of LIBOR and other benchmark rates over a number of years, which is revealed in the FSA’s notice and the CFTC’s orders of last week. In particular, I will ask you about what that episode reveals about the culture, controls, oversight and management of the bank.

Can we start, please, by getting the chronology clear? The period with which we are concerned extends from January 2006 to March 2012. That is correct, isn’t it, Mr Hourican?

John Hourican: That is the period.

Q3871 Rory Phillips: Within that period, the FSA shows that LIBOR manipulation occurred until November 2010 and that manipulation of the other rates occurred until August 2011. Again, can I ask you to confirm that, please?

John Hourican: Those are the facts.

Q3872 Rory Phillips: You all had managerial responsibility for the units of the business in which the misconduct took place, at the time at which it took place, didn’t you?

All witnesses: Yes.

Q3873 Rory Phillips: Mr Cameron, can I start with you? You were the CEO and then chairman of global markets until, I think, December 2008, when you left the bank. Is that right?

Johnny Cameron: Yes. Just to be clear, global markets encompassed two divisions. Therefore, I was only chairman of the global banking and markets business.

Q3874 Rory Phillips: You were also a member of the board.

Johnny Cameron: I was.

Q3875 Rory Phillips: You left, of course, in the immediate aftermath of the failure of the bank. As we know, there was a bail-out, using taxpayers’ money, to the extent of about £40 billion. Is that right?

Johnny Cameron: That is correct.

Q3876 Rory Phillips: Mr Hourican, is it still right that about 80% of the bank is owned, in effect, by the taxpayer?

John Hourican: 83% is, I think, the number.

Q3877 Rory Phillips: Mr Hourican, you rejoined RBS during the same period of crisis, didn’t you? In October 2008, you became the CEO of markets and international banking. Is that right?

John Hourican: That is correct.

Q3878 Rory Phillips: You are a member of the executive committee and the management committee of the bank.

John Hourican: That is correct.

Q3879 Rory Phillips: You report, I assume, to the group CEO, Mr Hester. Is that right?

John Hourican: Correct.

Q3880 Rory Phillips: He was appointed in November 2008.

John Hourican: He and I were appointed, I thought, on the same day; we certainly arrived at the bank at exactly the same moment.

Q3881 Rory Phillips: Before your return in October 2008, you had been employed by RBS between 1997 and 2005. Is that right?

John Hourican: I remained an employee of the group from 1997 continuously. For the one year prior to my joining in this job, I was the CFO at the ABN AMRO group for the consortium of banks that acquired it.

Q3882 Rory Phillips: Am I right to say that, for several years, you were finance director of corporate banking and financial markets?

John Hourican: In the early 2000s.

Q3883 Rory Phillips: In that job, did you report to Mr Cameron.

John Hourican: Yes, I did.

Q3884 Rory Phillips: Mr Nielsen, you have been with RBS, or the group, at any rate, for many years. Is that right?

Peter Nielsen: Yes.

Q3885 Rory Phillips: From 2005 to 2009, you were global head of rates, local markets, currencies and commodities. Is that right?

Peter Nielsen: That is not quite correct. The position I held from 2005 onwards was running the currency options business, the local markets business and the equity derivative business. I took over the responsibility for rates in late 2007, early 2008.

Q3886 Rory Phillips: During your period as head of rates and the job you have described before that, did you also report to Mr Cameron?

Peter Nielsen: No, I did not. I reported to Brian Crowe.

Q3887 Rory Phillips: Since his arrival at the bank, have you reported to Mr Hourican?

Peter Nielsen: Yes, I have.

Q3888 Rory Phillips: You were appointed in February 2009 to be global head of markets. Is that right?

Peter Nielsen: Yes.

Q3889 Rory Phillips: At about the same time, Sir Philip Hampton, the now chairman, was also appointed to that role. Is that right?

Peter Nielsen: I believe so.

Q3890 Rory Phillips: You are a member of the management committee of the bank.

Peter Nielsen: Yes.

Q3891 Rory Phillips: I would like to ask you now about the management structure immediately below you. Does the head of short-term markets and financing report directly to you?

Peter Nielsen: Yes, they did.

Q3892 Rory Phillips: What about the head of money markets trading? Did he report to the head of short-term markets and financing?

Peter Nielsen: We had a variety of structures over the time period that you are asking us about. The people who occupied those roles, at various times from 2006 until 2009, did report to me. From 2006 until I took over rates, the head of money markets reported to me.

Q3893 Rory Phillips: Again, to be clear, the people who are quoted and referred to in these notices are at levels of the organisation below the two officials I have just mentioned.

Peter Nielsen: That is correct.

Q3894 Rory Phillips: So far as you are concerned, Mr Hourican, I have one further question about the structure of the bank, which is this: where did the group treasurer fit in? To whom did-does-he report?

John Hourican: The group treasurer reports to the group finance director.

Q3895 Rory Phillips: He is also a member of the management committee. Is that right?

John Hourican: Yes.

Q3896 Rory Phillips: Finally on the bank’s structure, who in the bank is ultimately responsible for dealing with the regulators-the FSA and, in this case, the CFTC?

John Hourican: I think we were all responsible for dealing on a day-to-day basis with the regulators. In this instance, it was dealt with through our general counsel.

Q3897 Rory Phillips: Does any particular committee of the board have responsibility for those dealings?

John Hourican: I believe, and I would need to check this, that the group risk committee and the group audit committee both had engagement with the ongoing investigation and how we were dealing with the engagement with the CFTC and with the other regulators.

Q3898 Rory Phillips: In the statement that you made to staff on the day of your departure, you said: "The conduct of those involved was disgraceful and has brought shame on our company. Although the attempts to influence Libor submissions started before I took this job, it continued whilst I was in charge of the division. The continuation of this behaviour during the company’s darkest hours, when so many of us were fighting to ensure its survival, makes it all the more shameful. The people involved have left RBS and there is no place for that kind of behaviour in this company."

To start with you again, I do not think that anybody in this room would disagree with the description you gave there of the behaviour outlined in these reports as disgraceful. It is true also, is it not, that it has indeed brought shame upon the bank?

John Hourican: Correct.

Q3899 Rory Phillips: And the reputational damage is no doubt considerable and will continue to be so.

John Hourican: Yes.

Q3900 Rory Phillips: There is obviously, is there not, a risk of loss of confidence and trust in you both on the part of your customers and on the part of the public?

John Hourican: Absolutely.

Q3901 Rory Phillips: It is also true, is it not, that as you said, Mr Hourican, this misconduct continued for over two and a half years after you and, indeed, Mr Hester, took up your posts?

John Hourican: It is the case that the 21 people referenced in this investigation, or some of them, continued their subversive and secret actions in the bank during the time that we were trying to fix it-absolutely.

Q3902 Rory Phillips: But it goes much broader than that, does it not, Mr Hourican? The management failures identified in the FSA report, for example, extended until March 2012, did they not?

John Hourican: Yes, they did, as characterised in that report.

Q3903 Rory Phillips: And you were part of that management for that period of over two and a half years?

John Hourican: Yes, I was.

Q3904 Rory Phillips: As were you, Mr Nielsen?

Peter Nielsen: Yes, I was.

Q3905 Rory Phillips: The period that we are concerned with-after you arrived at the bank, Mr Hourican; or came back to RBS, I should say-is also a period in which, as I have said, the bank was in receipt of a gigantic amount of public funding, is it not?

John Hourican: That is correct.

Q3906 Rory Phillips: And that makes it even more disgraceful, does it not?

John Hourican: Yes, it does.

Q3907 Rory Phillips: Thank you. I would like to look today at some particular aspects of the managerial failings that are described in those reports, but first, can I ask you this, Mr Hourican? Do you, by your resignation, accept responsibility for those failings over the period that we have just discussed?

John Hourican: I do accept responsibility for the behaviours of our staff, and therefore, I accept responsibility for the failings that were found. It is important that we don’t talk about accepting responsibility, and then not do so in our actions. That is why I resigned.

Q3908 Rory Phillips: Thank you. That means there is an obvious question for you, Mr Nielsen, because you were one level closer to the coal face. The question for you, during all of this period, is whether you also accept responsibility for those failings.

Peter Nielsen: I do accept responsibility and I am accountable for those failings.

Q3909 Rory Phillips: Yet you remain in your post.

Peter Nielsen: Whenever you get an incident of this seriousness and this magnitude-of course, I contemplated resigning. In fact, John and I talked about it. We talked about both of us going, and we talked about myself going instead of him. I can’t comment on John’s actual decision, but from my point of view, I believe that we have accomplished a great deal since attempting to right the bank in 2009. I have appreciated being able to play a part in that, and I think I have got some more to offer.

Q3910 Rory Phillips: Is this decision something that you discussed with Mr Hester, the group CEO?

Peter Nielsen: I have not specifically offered my resignation to Stephen. I had that conversation with John.

John Hourican: May I add something to that? This has been a long and considered discussion between myself and my group chief executive, Stephen Hester. It was my considered opinion that the bank would be worse off and that the stakeholders, shareholders, employees, and indeed, our customers would be better served by Peter remaining at the bank from here. It is important that we acknowledge the responsibilities that each of us has for the people and their actions beneath us, and we are not here to excuse. We are here merely to provide some level of explanation, to help the Committee understand it, but it was my representation to Stephen and my recommendation to our board, through him, that Peter would be better serving all stakeholders were he to remain in post.

Q3911 Rory Phillips: I understand that, Mr Hourican, but you will understand also, I hope, that some observers see that Mr Nielsen, for example, was the global head of rates-the very area of the business that went so terribly wrong-he was there throughout the relevant period, in a position of important management seniority, and he apparently is to remain. Do you understand that?

John Hourican: I do understand that. The only explanation I will provide is that I have spent a very considerable amount of personal time thinking about this. At the end of the day, I felt that the right thing for the bank and for all of our stakeholders was that I would take the ultimate responsibility for this issue-for the behaviours of our people-and I am very sorry it happened on our watch. But I feel, in the round, given all of the achievements and the tasks ahead, that Peter’s staying at the bank is, in my view, the better outcome for all stakeholders, even if that may be difficult to understand in part.

Q3912 Rory Phillips: Can I ask you about the other senior managers I mentioned earlier? The head of short-term markets and financing, and the head of money markets trading-are they still with the bank?

Peter Nielsen: Depending on which period of time you are referring to, we had a variety of management structures. In 2007, the head of short-term markets reported up to the head of rates, as well as the head of money markets, and that individual reported to me. Those individuals are no longer with the firm.

Q3913 Rory Phillips: Is their departure connected with this LIBOR business?

Peter Nielsen: In some cases, no, they retired; and in one case, that is the case.

Q3914 Rory Phillips: So the people immediately below you in the management chain have gone. The man above you, Mr Hourican, has gone, but you remain in your post.

Peter Nielsen: That is not quite accurate, if you look at the management chain that has been in situ for the last several years. For the last 18 months or two years, underneath me there have been co-heads of trading. Underneath them have been the heads of short-term financing and of rates. Of those individuals, one has actually, unrelated to this, decided to retire, and the head of trading remains in situ.

Q3915 Rory Phillips: So far as the future of this part of the bank is concerned, it looks from Mr Hourican’s answer earlier as though it remains your responsibility to sort out the mess and ensure that the bank now complies with the very stringent requirements imposed on it as a result, for example, of the CFTC order. Is that correct?

Peter Nielsen: That is correct.

Q3916 Rory Phillips: The bank is effectively under some form of supervision for a period of up to five years, isn’t it?

Peter Nielsen: That is correct.

Q3917 Rory Phillips: Do you at least understand that some observers, seeing the way you were involved throughout this period, and realising that it now falls to you to head up the part of the bank that is under supervision and required to comply with the stringent requirements of the CFTC, will wonder whether it is likely to happen? Do you see that point of view?

John Hourican: If you do not mind, can I add one thing? Peter is being asked to co-head the markets with Suneel Kamlani, who is the current deputy of the wider banking and markets business. Their responsibilities are very clearly delineated in that co-headed structure. I have confidence that the combined co-chief executive jobs will provide all stakeholders with better confidence.

Q3918 Rory Phillips: Can I ask you a final question about your statement, Mr Hourican? You commented that all 21 individuals involved have left RBS. Am I right in thinking that some of those 21 individuals are still employed at firms within the group?

John Hourican: No, I think an accurate reflection of that is, of those 21 individuals, 14 have left the group and seven either have been through disciplinary processes or are currently going through them. That is an internal note that has ended up in your hands, but I was trying to ensure that there was a clear statement of record for our staff that we must send a cultural shudder down our organisation’s spine and begin to act on the words about taking responsibility, which I am not sure we always have.

Q3919 Rory Phillips: Can we then turn to the conduct complained of? Mr Cameron, I am going to ask you a question at last. It is clear from the FSA report, which I am sure you have read for obvious reasons, that the primary motivator for those involved in LIBOR and other benchmark rate manipulation was profit.

Johnny Cameron: Yes.

Rory Phillips: We do not have more up to date figures, but we have found numbers for the rates business as a whole for the first half of 2006. It seems-perhaps this accords with your recollection-that it was, by some margin, the biggest generator of revenue for GBM. It brought in about £500 billion, as far as we can see. Is that the sort of picture that continued for as long as you remained at the bank?

Johnny Cameron: Yes. You will have to forgive me because I left the bank over four years ago and I have not been able, in the time available, to look back at all the records. But the rates business was a very important business throughout that time. The rates business includes many things. For the avoidance of doubt, the LIBOR-linked activates, as Peter will know, are just a part of it.

Q3920 Rory Phillips: To be clear, the failings that were identified as misconduct in the FSA and CFTS reports were by no means limited to LIBOR. There was manipulation of a number of other benchmark rates, wasn’t there?

Peter Nielsen: That is correct.

Q3921 Rory Phillips: As far as you are concerned-and you continued at the bank after Mr Cameron left-did the rates business as a whole continue to be a significant revenue generator?

Peter Nielsen: Yes, it did.

Q3922 Rory Phillips: Are you able to assist the Commission with this question: what proportion of the revenue was LIBOR-related?

Peter Nielsen: To answer that question, I need to break it down. To give the Commission an idea, in 2008 the rates revenue was somewhere between £2.5 billion and £3 billion. That excluded the STMF income, which at that time was of the order of £1 billion or £1.25 billion. By definition, most of the short-term markets business was composed of the short-end foreign exchange business, the short-end derivative business and the money market business. Many of those instruments were related to LIBOR.

Q3923 Rory Phillips: Obviously that leads to the question that is on the minds of everybody in this room, which was not answered by the FSA. How much money did RBS make as a result of this manipulative activity?

Peter Nielsen: It is a very important question. We have spent quite a bit of time looking at it and we have had outside people looking at it as well. I would not want to say to the Commission that our examination is complete, but from what we have looked at we can find somewhere between a minimal and an impossible-to-see effect of the reprehensible and wrong rate rigging that was going on in LIBOR, and the actual P and L that was derived in that business.

Q3924 Rory Phillips: You are saying that it made no money for the bank at all?

Peter Nielsen: We can’t say no. The work has not been completed, but in many cases some of that errant request by these individuals would have had an effect that we cannot say benefited the bank. It may have benefited one trader’s portfolio at the expense of another one and, in fact, the bank might well have been worse off.

Q3925 Rory Phillips: So when the FSA says that everybody was motivated by profit, the traders were motivated by their individual profit and, no doubt, the influence that that would have on their individual bonuses, for example, as opposed to an overall profit for the bank. Is that what you are saying?

Peter Nielsen: That is correct.

Q3926 Rory Phillips: Presumably, Mr Hourican, when this started to emerge-you were, by then, very much in charge of the ship-that is one of the things that you wanted to know: how bad, at least in terms of money, is this?

John Hourican: Absolutely.

Q3927 Rory Phillips: And that was quite early on, wasn’t it? No later than 2010, I assume?

John Hourican: In April 2010 there was the first indication we had of issues that were in our LIBOR area.

Q3928 Rory Phillips: To be clear for everybody, that was when the American regulators insisted that you put in independent counsel to conduct an audit of what was going on in LIBOR in the US dollar.

John Hourican: Yes. We were going on a US dollar LIBOR, looking specifically at suppressions, and it involved a very extensive review of documents, taped records and all the other things that are in the documents in front of you. That investigation went on and concluded, in favour of the bank, that there was no suppression going on in the US dollar by RBS, and there was no evidence of such. It was not until we had a question from the European Commission in April 2011, when we began an investigation into Japanese yen LIBOR, and in May, one month after being asked to look at it, that we found some issues. We acted very swiftly on those traders and to ensure that we changed our processes to accommodate.

Q3929 Rory Phillips: We will come back to that, but on what you have said about being aware of what now appears to be the problem sometime in 2011, you will accept that that was about four and a half years after the relevant period as outlined by the FSA?

John Hourican: Yes. It was, in fact, after the manipulation that we subsequently found had, in fact, stopped.

Q3930 Rory Phillips: And it suggests, does it not, that at the very least there was a wholesale failure of systems and controls in relation to the submission process?

John Hourican: That is correct.

Q3931 Rory Phillips: Thank you.

Can we look at three aspects of management failure? First, for you, Mr Cameron and Mr Nielsen, because you were there at the time, there was co-location issue, described by the FSA in considerable detail-the decision taken by senior management to put the derivatives traders and money markets traders, some of whom were also LIBOR-submitters, on the same currency desks. A simple question first: Mr Cameron, were you involved in that decision?

Johnny Cameron: No.

Q3932 Rory Phillips: Mr Nielsen, were you involved in that decision?

Peter Nielsen: I was aware of that.

Rory Phillips: Were you involved in making the decision, Mr Nielsen?

Peter Nielsen: The people who made that decision, which would have been a joint venture between rates and money markets-the head of STM came to me and said that this was what they were doing. I was aware of this.

Q3933 Rory Phillips: And this is the person who has now left the bank?

Peter Nielsen: Yes, one of them.

Q3934 Rory Phillips: Is it the same person who, from February 2008, was a member of the BBA’s FX and MM committee?

Peter Nielsen: No, that was a different individual.

Q3935 Rory Phillips: So far as the decision to co-locate was concerned, were you not aware, Mr Nielsen, of the potential for misconduct identified by the FSA in their report that that would create?

Peter Nielsen: To be very frank with you, no.

Q3936 Rory Phillips: You should have been, with hindsight, shouldn’t you?

Peter Nielsen: With hindsight, yes.

Q3937 Rory Phillips: What did you do, once the co-location had been done, to monitor the situation to see how it was working out?

Peter Nielsen: The same set of processes and procedures, which were inadequate and did not work-

Q3938 Rory Phillips: The FSA says there were none, so can we take it that the answer is no, there was no attempt to monitor what was going on on the co-located desks?

Peter Nielsen: There was no attempt to monitor with regard to the independence of the submission between 11 o’clock and 11.10.

Q3939 Rory Phillips: There was nothing to check that the risk that the FSA describes-

Peter Nielsen: That is correct.

Q3940 Rory Phillips: And as they explain in the report, it did not take very long for the traders and the submitters to work out exactly how to go about their business. That is right, isn’t it?

Peter Nielsen: That is correct.

Q3941 Rory Phillips: So are you saying that at no point during your time as the relevant senior manager were you aware of what was going on?

Peter Nielsen: I was not aware that in the yen and the Swiss, the derivatives traders were making these requests.

Q3942 Rory Phillips: The impression given in the reports is that they were not making any attempt to cover anything up. This is all very blatant-that is the word that the FSA uses. Are you saying that none of the management, including you, were aware of what was going on on the trading floor day in, day out for years?

Peter Nielsen: I think we were aware of what was going on on the trading floor-

Q3943 Rory Phillips: What did you do about it?

Peter Nielsen: One of the features that we see here is that we had issues-very serious issues-in the submission of rates for Japanese yen and Swiss francs. It is also significant that we did not have issues in the larger currencies-US dollars, sterling and some of the other currencies. I think the senior management felt that it was almost a mathematical impossibility for somebody to have affected the LIBOR submission, because of the arithmetical nature of the topping and tailing. Obviously, that was a mistake.

Q3944 Rory Phillips: Let me ask you a very direct question. Did you know that the derivatives traders were routinely asking the submitters on the desk to submit rates favourable to their positions?

Peter Nielsen: No, of course not.

Q3945 Rory Phillips: Who should have known that in the management structure below you?

Peter Nielsen: The supervisors of the individuals.

Q3946 Rory Phillips: Really? No higher than that? No higher up the management chain?

Peter Nielsen: No. Obviously, those supervisors and potentially the people supervising them.

Q3947 Rory Phillips: If you think of the damage that this has caused to the bank-the amount of money it has cost and all the other things we have just been through-it is perfectly obvious that somebody much more senior in the structure should have been monitoring what was going on and putting a stop to it.

Peter Nielsen: I agree.

Q3948 Rory Phillips: What was risk control doing in this part of the bank?

Peter Nielsen: This was not viewed to be a significant risk.

Rory Phillips: Quite mistakenly.

Peter Nielsen: Mistakenly.

Q3949 Rory Phillips: Did nobody worry-for example, Mr Cameron, you were there at the time-that the primary submitters’ bonuses were linked in part to the profit and loss figures on their money market trading books? Did nobody think about that?

Johnny Cameron: I would not know if they did think about it or they didn’t, quite honestly.

Q3950 Rory Phillips: Because you were too elevated to be concerned with that?

Johnny Cameron: They were several levels below me. Their bonuses and so on would be fixed by their bosses.

Q3951 Rory Phillips: What we have been discussing here is a management failure. In the end, surely you must accept, as the senior manager in this enormous chain, responsibility for that failure.

Johnny Cameron: Absolutely. I agree with what John said earlier in that respect. As captain on the bridge, one has to take responsibility-accountability-for these awful events.

Q3952 Rory Phillips: The culture that was embedded in the co-location continued, did it not, Mr Nielsen, after they were in fact separated-the derivatives traders and money market traders-in late 2008?

Peter Nielsen: That is correct.

Q3953 Rory Phillips: The separation, by the way, was not for compliance reasons, was it? It was for purely business reasons.

Peter Nielsen: For business reasons, yes.

Q3954 Rory Phillips: So it continued, as we have heard, until-in relation to LIBOR-the end of 2010.

Peter Nielsen: That is correct.

Q3955 Rory Phillips: And in relation to the other currencies, until the late summer of the next year, 2011.

Peter Nielsen: That is correct.

Q3956 Rory Phillips: Can I now ask you, Mr Cameron, some questions about management and culture? It is back to profit. The systems-as the FSA described-that worked in these currency desks were actually very good for profit. Does that sum up the culture of the bank as it was when you were in charge of it-in other words, a quick route to profit; don’t worry about the corners cut?

Johnny Cameron: No, I do not believe it does. I do not think that would be fair to the bulk of the people in the bank. As to the culture of the bank, at the very top we tried to set a tone of high ethical and moral standards. For example, I appointed Brian Crowe as the chief executive of the investment bank; at the time he was a lay preacher and he is now a fully fledged vicar. I led a team to build a set of values, and we established what those values were-moral, ethical and cultural values. I spent a lot of time walking the talk and trying to instil those values. The compensation structure was changed by me so that part of the compensation was based on how people lived up to those values, as judged by 360° peer reviews. I appointed both John and Peter in their posts at one time or another, and I think they are good people. It is shattering to us, because we try to hire good people, appoint good people and lead well, but with 15,000 people, you cannot impose moral standards on people who do not wish to be moral.

Q3957 Rory Phillips: Just picking up a couple of points from that, if I may: first of all, you will understand that this Commission has now heard a very large number of people saying roughly what you have just said-that from the very top of these organisations, you tried to instil the right culture and the right tone. The reason we are here is, I am afraid, because you were-importantly-very unsuccessful.

The conduct, as I have said, was described by the FSA as "deliberate, reckless and frequently blatant", so these are not people hiding in corners, doing their best to cover up what they are doing; they are talking to each other and communicating on the internal systems in an utterly unrestrained way. What was it about your management that failed to pick this up at all?

Johnny Cameron: I have read many of the transcripts of submissions to this Commission, and I agree with what you say. One observation I would make, if I may, on the back of that is that almost every bank in the world, if the reports are to be believed, had been involved in some way in this. A possible observation-I won’t go so far as to say lesson-would be that it is as much about the culture of traders and the people who trade things as it is about the culture of any one bank. It would be my contention that traders are more similar across banks than they are alike with other people in the same bank. The relationship managers, the credit managers, the straightforward bankers in RBS are totally different to the traders in the bank.

Q3958 Rory Phillips: Certainly the behaviour described suggests a culture in which nobody saw any particular need to cover up what they were doing. That suggests a pretty widespread and embedded culture in that part of the organisation, does it not?

Johnny Cameron: I agree with that, but it is within a small number, in the context of 10,000 or 15,000 total employees in the investment bank, who are, if you like, part of the trading culture.

Q3959 Rory Phillips: But it is improbable, isn’t it, that that sort of culture would not have been perfectly well known by any competent manager in the various layers of hierarchy, which we have now been through, above the traders? They are not working in a separate world or a separate business, and it is your job to manage them.

Johnny Cameron: I could not agree more.

Q3960 Rory Phillips: You must surely have known, then, what was going on and what their culture was, at its most general.

Johnny Cameron: No. That is why traders need very tight, close management. In the particular case of LIBOR, as Peter has outlined, the risk managers, control managers and so on and so forth completely missed the point, because everybody thought that the way LIBOR was fixed was that there are however many banks it is and the bottom quartile and the top quartile are excluded. It just did not occur to anyone-and this is me reading reports as much as anything-that this was a rate that could be fiddled, but then it turns out that there was a cartel of people across a number of banks who felt they could fix it. I don’t know to what extent they were successful. But yes, there are a number of things that have come out in this Commission and other committees where, with hindsight, dreadful things happened because the risk managers missed the potential risks that we are now talking about.

Q3961 Rory Phillips: Mr Hourican, you came in as part of the new broom, as you have explained, in October 2008. Presumably, one of the things you were there to do was sort this failed bank out. One of the ways in which it now seems obvious that that should have been done was to sort out the endemic culture that Mr Cameron has described, but you do not seem to have got to grips with it at all.

John Hourican: If I may, I will add some context and then answer the question more directly. At the time we took control of the bank, the bank had had a cardiac arrest; it was effectively over-levered and under-capitalised. It had far too many risk concentrations and was barely into the integration of the world’s largest ever hostile cross-border break-up of a financial institution. The violent arrest that this bank suffered was the first cultural shudder that was sent through this organisation. It is utterly reprehensible that people at that moment felt that they could continue with the behaviours that they were doing, and we did not find it.

It is the case that we prioritised the existential existence of this bank for the first months and years of managing it. It is not an excuse; it is an explanation of where we were. We had the world in financial reverse. We took half a trillion pounds off the balance sheet of this bank from its peak. We did in fact stabilise the customer base. We removed 14 countries and we sold or closed a commodities business. We ultimately took an equities business out of it as well. We saw thousands of our colleagues leave the bank in an organised way and we still managed to deliver a positive contribution, as you will see from my note which you have in front of you, of £12 billion to the remedy of some of the things that had occurred in the predecessor banks, both ABN AMRO and RBS. While I would not take exception to the idea that we did not deal with culture, we started with a very broken bank and we started to resolve it.

If I may add one or two other things, culture is strands of activity and how you create the character and the tapestry of the company going forward. We dramatically increased the bringing in of graduates to the bank, even while we were taking vast numbers of people out of the bank. We tried to change the type of people we were bringing in. We hired 1,000 graduates over the past four years directly into the investment bank while we were shrinking it. We tried to focus on our engagement in the community in a different way than we have ever done in the past. We tried to be a very transparent, honest and open management in how we went about it.

I will give you one example of how we have gone about moving from trusting people excessively to trusting and verifying what they do. In the past year I have sat with traders on the desks, unannounced, and said, "Take me through what it is you do that gives me comfort that you are doing your job well." That is not a culture that would have existed in this industry or this bank in the past.

I will finish with the types of things we would have asked them: "Show me what you flashed as your profit and loss on a daily basis. Show me how that was verified by finance. Tell me why there were differences. Show me how you make sure your people take their annual leave on a two-week consecutive basis and tell me how you have done it. Show me who had access to this office after hours and show me what you did to confirm that it was appropriate. Show me who was on our systems when they shouldn’t have been. Show me whether you have signed off the access to all the systems they have and how often you do it." That is a list of things that I personally will have run through with a number of traders around the world. That is the type of thing that over time changes the culture of an institution.

Q3962 Rory Phillips: But presumably now you wish that you had done that much, much earlier?

John Hourican: Yes, I do.

Q3963 Rory Phillips: Because, although as you described, you did indeed come into the accident and emergency department of this bank, as it were, that does not work, does it, once you get into 2010 and 2011-2012, even-when management failures are highlighted by these reports.

John Hourican: Absolutely.

Q3964 Rory Phillips: You should have been acting to deal with these problems much earlier, shouldn’t you?

John Hourican: Yes.

Q3965 Rory Phillips: Can I look at another example of the cultural problem-the wash trades? The FSA highlights them-corrupt payments, for no good reason; there is no commercial justification. They described them as readily detectable. They were mirror trades to no purpose, other than to give backhanders to those who were involved in the manipulation process, and yet nobody, apparently, and none of the systems at RBS detected them and they were first detected by the FSA. Is that right, Mr Hourican?

John Hourican: In this case, yes.

Q3966 Rory Phillips: That shows, does it not, what a complete failure there was in this area of your business of all risk controls, compliance monitoring and other systems. Those trades, which were not hidden and were absolutely blatant according to the FSA, went undetected until the regulator pointed them out to you.

John Hourican: We did fail to pick up the wash trades.

Q3967 Rory Phillips: And wasn’t that, again, another good indicator of the sort of culture that pertained at the bank? People did not think they needed to bother to disguise the bribes that they were paying to others involved in manipulation outside the bank.

John Hourican: We are revolving this conversation around the same 21 people who are in this-

Q3968 Rory Phillips: Are you saying that your evidence to the Commission is that nobody at the bank was aware of these activities at the time?

John Hourican: I have no evidence that anyone else was aware.

Q3969 Rory Phillips: That is not quite the same is it? Are you sure that we are only talking about 21 people out of your employees at the time?

John Hourican: Of the 11 million documents and 66 million pages of review that has occurred, of the 1,800 hours of listened-to tape, of the 100 interviews that have been done across our traders and managers, I have no other evidence that anyone else was aware of this. If I did, I would have acted on it.

Q3970 Rory Phillips: The third aspect of management I would like to look at is the much more recent period when you, Mr Hourican, and you, Mr Nielsen, were in your posts. The BBA and the media were expressing concerns about the manipulation of LIBOR from the time of the financial crisis in 2008, weren’t they?

Peter Nielsen: Yes, they were.

Q3971 Rory Phillips: And you had a representative on the relevant BBA committee, the FX and MM, didn’t you?

Peter Nielsen: Yes, we did.

Q3972 Rory Phillips: And the BBA published guidance to all participating banks in August 2008, terms of reference in July 2009 and further guidance in November 2009-that’s right is it not, Mr Nielsen?

Peter Nielsen: That is correct.

Q3973 Rory Phillips: The FSA points out that it is particularly troubling that you completely failed to comply with any of that guidance because, as I have said, you had at all times a representative on the committee, didn’t you?

Peter Nielsen: That is correct.

Q3974 Rory Phillips: Is that representative the head of short-term markets?

Peter Nielsen: Short-term financing-short-term markets and financing.

Q3975 Rory Phillips: And he has left the bank?

Peter Nielsen: Yes, he has.

Q3976 Rory Phillips: The position gets worse as we move into 2010. You have described, Mr Hourican, how the American regulators came on the scene. Clifford Chance investigated. Their investigation went on for many months and generated all the material that you have been describing, and various personnel, including managers, were interviewed, weren’t they?

John Hourican: Yes.

Q3977 Rory Phillips: You were interviewed, Mr Nielsen, weren’t you?

Peter Nielsen: Yes.

Q3978 Rory Phillips: One of the major focuses of the investigation was the same person I have mentioned, who was the committee member of the BBA’s FX and MM committee, wasn’t it?

Peter Nielsen: That is correct.

Q3979 Rory Phillips: As the investigation continued, there was no particular reason to think that things were going to get better, was there?

Peter Nielsen: No.

Q3980 Rory Phillips: As more information emerged you were not being presented with a glorious and sunshiny picture. As far as the American regulators were concerned, things were getting worse, weren’t they? There was more for them to investigate, and they continued the process.

Peter Nielsen: They did continue the process, that’s correct.

Q3981 Rory Phillips: Mr Hourican, when were you first aware of the allegations or the misconduct that is now set out in the regulators’ reports? Which year and which month?

John Hourican: I do not have an exact recollection of it, but I was kept constantly informed. I was aware that the CFTC had made the inquiries and I was kept informed.

Q3982 Rory Phillips: To try to help you, they made the request for the independent investigation in April 2010. Were you aware before then?

John Hourican: No.

Q3983 Rory Phillips: You think that that was what triggered your awareness of the matter.

John Hourican: Yes, it was.

Q3984 Rory Phillips: What about you, Mr Nielsen? Were you aware before then?

Peter Nielsen: I was made aware when we received the notice from the CFTC.

Q3985 Rory Phillips: That was a very serious moment, wasn’t it? The idea of being investigated by the American regulators, apart from anything else, is potentially a very serious moment for any bank, isn’t it?

Peter Nielsen: I would say so of any regulator, not just American regulators.

Q3986 Rory Phillips: Did you, Mr Hourican, make sure that the group CEO was aware?

John Hourican: Yes, I think I did. I am sure I did.

Q3987 Rory Phillips: As far as you know, was the matter reported to the board?

John Hourican: I think that once the investigation got under way, it was, through the regular risk reports that Nathan Bostock, the chief risk officer, gives to the board.

Q3988 Rory Phillips: As the investigation continued, did you report to the executive committee of which you were a member?

John Hourican: How things were going was generally reported through the chief risk officer, because general counsel was doing most of the work.

Q3989 Rory Phillips: Did you discuss the issues with Mr Hester as they emerged?

John Hourican: Not extensively, but at the moments where it was required I would have had discussions with Stephen.

Q3990 Rory Phillips: Were you ever required to make reports to the board?

John Hourican: I was not required, as an individual, to report to the board on this matter. It was reported through the CRO’s monthly report. The risk function was dealing with ensuring that we and the legal function were engaging fully with the regulators.

Q3991 Rory Phillips: Indeed. They may have been dealing with it, but as the FSA report makes clear, the manipulation continued for over another year, until the summer of 2011. That’s right, isn’t it?

John Hourican: Yes, it is.

Q3992 Rory Phillips: So whatever they were doing, it wasn’t very effective, was it?

John Hourican: Not in hindsight.

Q3993 Rory Phillips: The management failures described by the FSA continued for nearly two years after the American regulators came on top of you, until March 2012.

John Hourican: The majority of the issues that were identified were dealt with by March 2011. The issues identified that were relevant to the submission and creation of policies around LIBOR submission data were put in place and made sure they were in place for the money market traders by March 2011.

Q3994 Rory Phillips: What the FSA say is that you were beginning to get a grip on it in March 2011.

John Hourican: If we can explain the sequence of events, it may help you understand what happened.

Rory Phillips: Thank you.

Peter Nielsen: We did spend the first eight or nine months dealing with the CFTC’s request in looking primarily at dollars, which is why the millions of documents and hours of tape conversations were reviewed. Going into the latter part of that year, which is 2010, and going into the first quarter of 2011, we were finally coming to grips with their requirement of needing policies and procedures on LIBOR. That was late, and it was slow, and it should have been earlier, but-

Q3995 Rory Phillips: Can I interrupt? There was a specific problem about that, wasn’t there? The issues on procedure, which were identified by your internal audit, were identified in a report to the member of the BBA’s FX and MM committee.

Peter Nielsen: That’s correct.

Q3996 Rory Phillips: That was the same person who had, as you have confirmed, been a primary focus of the Clifford Chance investigation, wasn’t it?

Peter Nielsen: That’s correct.

Q3997 Rory Phillips: Was it not an obvious difficulty with the way the bank’s management was going about this, that it entrusted responsibility for putting things right to somebody who was being investigated for his part in the original misconduct?

Peter Nielsen: That is a point of view.

Q3998 Rory Phillips: Do you agree with it?

Peter Nielsen: I think a number of people, all the way up to myself, were dealing with attempting to put this right-

Q3999 Rory Phillips: You were dealing with it very, very slowly. Is that fair?

Peter Nielsen: Too slowly.

Q4000 Rory Phillips: Yes. You should have acted much, much quicker.

Peter Nielsen: On the other side of that coin, if I am honest and look in the mirrors-we had many failings in this process-we were very slow in terms of taking the BBA’s terms of reference and incorporating that into policies and procedures, and delivering them.

Where we acquitted ourselves better is once it was brought to our attention that we had the problems that were subsequently found in yen and Swiss, where we found them and brought them to the regulators’ authority in July 2011, we dealt with those extraordinarily expeditiously. We went from finding them to suspension and disciplinary process in a matter of weeks.

Q4001 Rory Phillips: Can I ask about the attestation? The FSA place great emphasis on the attestation that was required from the bank in February 2011 and came in a letter on 21 March written by the group treasurer. The FSA, in their report, had this memorable comment to make about it: "The FSA has not concluded that RBS deliberately misled the FSA with respect to its attestation." I think in FSA report-speak, that means that they have just-just-acquitted the bank of dishonesty. That letter was written by a very senior official of the bank, was it not-the group treasurer?

Peter Nielsen: That is correct.

Q4002 Rory Phillips: Were you involved in approving the terms of that letter, Mr Hourican?

John Hourican: No.

Q4003 Rory Phillips: Were you involved, Mr Nielsen?

Peter Nielsen: No.

Q4004 Rory Phillips: Did you discuss the fact that the letter had to be written by the group treasurer with him before it was sent?

Peter Nielsen: No.

Q4005 Rory Phillips: Are you aware with which other colleagues in the bank the group treasurer discussed the terms of that letter before it was sent?

Peter Nielsen: I believe, from reviewing the documents-I have not had a conversation with him about this-that he at least had that conversation with a number of professionals in the audit function.

Q4006 Rory Phillips QC: Did he discuss it, do you believe, with his own line manager, the group finance director?

Peter Nielsen: I am unaware of that.

Q4007 Rory Phillips: Do you think it is possible that its terms were discussed by a committee of the board? The audit committee, for example.

Peter Nielsen: I do not know.

Q4008 Rory Phillips: Is the group treasurer still in post?

Peter Nielsen: Yes.

Q4009 Chair: Before we leave this, was consideration given to not keeping you in post? Were you party to any of those discussions?

Peter Nielsen: No, and may I say that I think we have an extraordinarily competent group treasurer.

John Hourican: I would echo that. He reports to the group finance director, which is outside the line of this business.

Peter Nielsen: Correct.

Q4010 Rory Phillips: The final question I wanted to ask you two-I am sorry, Mr Cameron, that you are getting a very unequal share-is this: you have already made a number of general comments intended to reassure the Commission, and now we have together been through this rather unedifying history of management failure, what can you say in addition to give the Commission assurance that this sort of wholesale failure will never be repeated at RBS?

Peter Nielsen: I wake up every single day and attempt to make sure that that is the case. Obviously, nothing in this world is 100% certain. Can I add to what John was describing in terms of what we went through from 2009 to 2010? You point out that that story stops at some point in 2010; then, in 2011, the record shows that we made a great deal of progress on a number of the more cultural and attitudinal issues that have been brought out of the FSA and CFTC probes. We have-management have, I have and my management team have-all taken those directly to heart. Other than fixing those, there is nothing that is more important to myself and that team.

I will say that-holding a mirror up and being completely frank-during 2009 and 2010 we focused almost exclusively on the things that broke the bank. This bank went broke for funding failures, for leverage failures, for market-risk failures and for having market risk that it could not calibrate or count. It did not know what it had. It had three separate credit businesses. Fixing that occupied everybody, not just the front line, but the second and third lines of defence. I sleep very comfortably at night in terms of those risk issues. We are guilty of lots of things. If we had that to do over again and if we could have taken 10%, 15% or 20% of the effort that we spent in 2009 and 2010 getting our arms around that risk and focusing more quickly on the cultural and attitudinal aspects, I think we would be in better shape. We are engaged in that process on a wholesale effort at the moment.

Q4011 Rory Phillips: Thank you. Mr Hourican, you have paid the price in that sense. Is there anything that you want to add in answer to my question?

John Hourican: Much of the testimony that I gave you earlier on is the bedrock of why I think what I think. You also have my note to staff, which is a very clear record of what I think. The cultural shudder that we have sent down the spine of our organisation by my taking responsibility for the actions of people deeply embedded in the company is an important point. As I have said to some people who have been willing to listen, they should not waste my death, which is perhaps not a nice way to describe it.

I think it is incredibly important that the company-everyone in it-really stands up and feels the anger that exists around the issue, exists around the industry and, because of our own peculiar circumstances, exists around our company. Before I depart the bank fully, I will go and spend some time with each of the trading floors and each of the major populations of staff to make sure this message is delivered very firmly home. I think it is incredibly important that we recover the trust of all our stakeholders through how we act, and how we act must be moving away from blind trust to trust and verify. Those are the circumstances we find ourselves in today.

Q4012 Chair: I just want to ask Mr Nielsen one set of questions. You were in a key position to identify the LIBOR risk. You were in overall charge of that area, but you didn’t find it. That’s correct, isn’t it?

Peter Nielsen: That’s correct.

Q4013 Chair: You agreed earlier that there were disastrous failures of controls, and over many years, and they took place on your watch as well.

Peter Nielsen: That’s correct.

Q4014 Chair: You have agreed, and Mr Hourican has confirmed, that you should have been dealing with these problems on the trading floor and elsewhere in the bank much earlier, and you agreed that the explanation for your failure to deal with these in 2008 and 2009 could have been what was described as accident and emergency work, but not for the more recent work that you have done. You would agree with that, too-it is not an adequate explanation for your failure to deal with this in 2010, 2011 and 2012?

Peter Nielsen: I wish we had gotten to them earlier.

Q4015 Chair: You have agreed on a number of other points, too, that you acted far too slowly-not least, for example, with respect to the BBA’s terms of reference.

Peter Nielsen: That’s correct.

Q4016 Chair: Given all that, why is it that you feel we should rely on your judgment to continue the clear-up operation in RBS?

Peter Nielsen: I think that that judgment, again, shouldn’t just be relying on what I say, but the record of what we have been doing since 2011-there were some additional things that we accomplished in 2012. But if you look at where we are with LIBOR, for instance, it’s a separate set of individuals that do it. They have a separate set of policies and procedures. There’s completely separate detection and observation of e-mails and conversations that are going on here. And we have accomplished that not just in recent weeks and not just since the settlement. As soon as we found the major and, if I can say this, heart-rending issues that were brought to our attention in the middle of 2011, we got to work on those, and I think we’ve made manifest progress. That’s just the topic of this afternoon, which is just one aspect.

I think what’s important is that people don’t just come to the process in an attempt to fix a problem when one needs to delve into what the themes are that actually caused this. John has quite articulately mentioned a number of the reforms that we have put in place, but if you look at the work that RBS has done on compensation, I think we can lay much of what happened in 2006, ’07 and ’08 at the door of the very stridently individual-oriented compensation that existed both-

Chair: And ’09, ’10 and ’11.

Peter Nielsen: Both within our firm and within the industry. I think that in addition to the very public avowal that we’re a back marker in overall compensation within financial services, we are a forward marker, and have been a forward marker since Stephen Hester took up his role. We were the first with clawback. We were the first with more aggressive deferral structures, announced in 2009. These are vehicles through which the institution is able to enforce the changes in behaviour that I think we have already seen, and we will see an example of that again this year.

Q4017The Archbishop of Canterbury: Mr Hourican, your presentation in March 2010 showed that the RBS investment bank had a footprint in more than 50 countries. Was it simply too large and too complex to manage? Was it impossible to manage adequately?

John Hourican: It was certainly too large. I would have accused the predecessor organisations of what I would describe as strategic tourism-being in too many places, doing too many things, with too little capital. The ABN AMRO network combined with the RBS network created a 52-country network. We closed 14 of those countries.

Q4018The Archbishop of Canterbury: So you think it is perfectly possible to manage a 38-country network?

John Hourican: I think it is possible to manage if you know why you are there, what you are doing and who you are doing it for. When we took the strategic review that we did, we looked at who our customers were and we reduced the number of customers we were focusing on to ensure that we had some purpose for them. We looked at the products we were doing and asked whether they were relevant to our customers, and we looked at where we did the work for them. We retained a network across the banking and markets business which was designed to serve the export and import and capital needs of our customers. So we sit on about 82% of the world’s trade corridors to ensure that we can play our part to make our customers a success and be a success ourselves.

Q4019The Archbishop of Canterbury: When the former head of UBS was giving evidence here, he was asked what he would do differently. He said he would keep it simple. He did not mean 38 countries, he meant about three divisions and a lot fewer than 38 countries. You are remarkably optimistic about the management capacity of large and complex institutions.

John Hourican: Complexity, in many ways, is lots of layers of well managed simple; what we had was a lot of badly managed simple. What we need to ensure that we do, in shrinking down the activities of this company-its leverage, its balance sheet use and its products-is to try to get it to a manageable level of complexity that serves our customers well. There will always be complexity in this business. It is difficult for me to stand here and say that we could make it so simple that it was both really easy to understand and really easy to manage. This is a difficult business to manage.

Q4020The Archbishop of Canterbury: Mr Cameron, your evidence was very interesting. Obviously, you have taken personal responsibility for a lot of what went wrong and have said so publicly and clearly. In one of your comments, you said that you cannot impose moral standards on those who do not want to be moral. This afternoon, you said that one of the problems was the culture of traders, not the culture of the bank. We are talking about high money, high pressure, high volume and high living among those who are involved in those markets, I think it is fair to say. Risk management means knowing the risks, but it appears that the risk of sheer immorality-to pick up your phrase about moral actions-was not managed. It was not recognised and therefore could not be managed. How do you test for the moral culture of a trading floor? And is it possible? From what you have said, I get the impression that you do not think that it is possible.

Johnny Cameron: You are straying into very philosophical territory.

The Archbishop of Canterbury: But it is the one that brought down the bank.

Johnny Cameron: If I may say so, I think that you slightly misrepresented one thing that I said. I do think that traders have a particular approach to life and need much tighter and closer controls than many other people who work in the bank. By and large, those controls are imposed. What happened in this particular case-I look to my colleagues to correct me if I am wrong-is that the risk managers did not recognise this as a risk. Those controls were not there. That is not the same as saying, which I think you were implying, that by and large, we are all very well aware of the risk of traders, of putting tickets in drawers. We all read about what traders can do as individuals, and the risk controls are designed to-and should-protect the bank against traders misbehaving.

Q4021The Archbishop of Canterbury: I am trying to look forward to the development of a culture here. I want to come to one other question about that after this. Part of this culture seems to be an incapacity to recognise the human-generated risks as opposed to the credit or transaction-generated risks. You did not recognise that people would be doing things that were significantly wrong.

Johnny Cameron: And I am afraid that I do not quite agree with you. I think that, by and large, the risk controls do recognise that and do try. John went through-eloquently, I thought-how he sat on traders’ desks and asked them various questions. The controls of the traders absolutely bear in mind the possibility that traders will misbehave. The problem in this narrow instance is that no one envisaged that LIBOR could be fiddled by a cartel of traders across many banks.

Q4022The Archbishop of Canterbury: Yet, to many of the questions that Mr Phillips put to you-the three of you-the answer was, "I don’t know", or "I didn’t know", when it came to being aware of what was going on around LIBOR. So it seems that the risk systems were simply not picking up a risk that you had not envisaged happening. They had a pretty wide mesh.

Johnny Cameron: I do not believe they had a very wide mesh, but they had an enormous hole as regards LIBOR and nobody in risk recognised that.

John Hourican: You quite rightly characterise that there was a risk that we did not pick up, but the limit structures, the daily P and L structures, the balance sheet limits, the leverage limits, the various reconciliations and the mathematical calculated risk limits-all the things that you would expect to be ongoing and enveloping a trader, a trading desk or a business of this type-are deeply embedded and actually cultural on the floor. And there are golden rules that, if you breach them, you have a sanction, and they are categorical.

This LIBOR issue was a data submission to a Thomson Reuters trade capture, which was arithmetically averaged and the outliers were taken out. None of us thought of this as a risk that needed the level of attention that other risks were getting, and it is a regret that we didn’t realise that.

Q4023The Archbishop of Canterbury: But the risk of someone deliberately quoting off the market is a risk that we all recognise. Anyone who has run a trading floor recognises that traders might have a reason for doing that; there is always the temptation. And that was essentially what was going on. It was quoting off the market, it was quoting a rate that did not represent the genuine level of the market.

Johnny Cameron: I don’t think it was quoting a rate; it was making a submission to a panel or whatever. They were not dealing on those rates, and that is part of the problem.

Q4024The Archbishop of Canterbury: I think that I would say that that was a distinction without a difference. However, what I am getting to is that it is nevertheless extraordinary what happened in the culture of the bank-this is important in what you do about the future culture of the bank-when something was happening that all of you say was catastrophic, utterly wrong and totally inadmissible on any basis of morality. How many whistleblowers told you about this during the time that it was happening?

Johnny Cameron: None.

John Hourican: None.

Q4025The Archbishop of Canterbury: Why? Was there not one person anywhere who thought, "Hang on a minute, this is just not the right way to behave"? And what does that say? How do you set a culture in the future that means that someone-because it only takes one-will say, "That is really not sufficient"?

Johnny Cameron: Speaking entirely for myself, I would happily engage in a long debate, not that we have the time this afternoon. I don’t have a silver bullet; I don’t have an answer; and I very much hope that this commission comes up with some suggestions that can improve the outlook. I don’t think it’s very easy.

Q4026The Archbishop of Canterbury: Fundamentally, some of us think that the answer might be to make banks a heck of a sight simpler, so you can check much more easily what is going on.

John Hourican: May I add something that might add some tangible help about the clawback arrangements that we have in place? When we took over the management of this bank in late 2008-at the winter of its existence-we realised that the cash system of people being paid for the prior year and being able to walk away with everything was not good. So we put in place some very long deferrals-at the time they were very long deferrals but they are now more market practice. So we didn’t pay anyone anything for the 2008 performances until a year and a half later, and then they received the rest over a three-year period. Our deferral process is such that if you get paid something, you get paid it for a three-year period. That is a starting point. We can also take it back, and it really is the tapestry that is created by all of the threads that we put in place that will create the culture.

The other thing I would say is about whistleblowing. I want the culture of the company to be one of calling each other to attention, much rather than using a whistleblowing channel. Having a lot of whistleblowing in a company that is not part of the normal running of the company is almost as bad as having none, because what we want to have is a culture where people hold each other to a high level of moral account in the company-that is certainly what I would like to aim for.

Q4027The Archbishop of Canterbury: When we were talking about the attestation from the group treasurer, it was clear that there had been no consultation by the group treasurer among the most senior people involved in other areas. You both said you did not know about the attestation: you did not know its contents and you did not know, before it was sent, what was involved in it. Does this not point to a culture of non-transparency, silo management that is still in place and a lack of willingness to consult? For a major and incredibly important document, a very significant number of people should see it and be allowed to test and challenge it before it goes out.

Peter Nielsen: I would not characterise it as such. The audit that the group treasurer was relying on came through the normal GIA audit process, and I would have seen a copy of that report, as usual. I would not necessarily have been consulted on the terms of reference, but I think he was entirely within his rights. He did not just blindly check a box-

Q4028The Archbishop of Canterbury: I am sure. I am not suggesting for a moment that he did. But he didn’t consult you.

Peter Nielsen: He didn’t, but I think it goes to what both John and Johnny referred to. I do not think that many people thought that there was the potential for this kind of abuse. We have reconfigured our audit function, and I do not come from a culture that blames risk or the second or third line of defence-I believe it is the responsibility of the first line of defence. I think it goes, more pertinently, to your first question, which was: was it too big and was it too complex? I think the group treasurer was doing an awful lot. We had gone through heroic hoops to change the funding profile of the firm over 24 months, from something that was calibrated in a number of hours to one that could survive now very comfortably for months on end with broken wholesale financing markets. That was a large portion of what that function was up to.

If I may make a reference to some of the Wheatley reforms-we have commented on that and made comments into the FSA’s 12/36 document-many of those reforms will go a long way to remediating some of these issues. We had fundamental problems with a survey-based index that was based on where people might be able to raise deposits-a would or a could. The thrust of those reforms, to look at actual transaction data, is exactly right. We now have the reporting of our LIBOR submission going up into group treasury. That gives it independence of the actual markets, but we have to be careful that it does not lose the currency of being close to the markets, so that it actually represents the transactions that are actually being undertaken.

Q4029 Lord Turnbull: Last week’s statement from RBS referred to 21 wrongdoers. By my calculation, 15 have left the bank, either dismissed or jumped before they were pushed. What steps have been taken to make future employers aware of their record while at RBS?

Peter Nielsen: I think the actual numbers work out to be: two of those employees have been disciplined and are still with us, so the decision there was that they were very junior or trainees-when they went through the process, they may only have been in the position for a number of months-so a final written warning and an explanation is probably the right outcome for that individual. Another three individuals are still involved in the investigatory and disciplinary process. For the people who have departed, those who have been dismissed, unlike three, four or five years ago, there is not a box-ticking exercise but identification to the FSA of their circumstances. A number of employees-not those employees, but employees about whom there has been no question-are having difficulty in getting recertified at a different firm. The sieve that the system and the market are placing on the transference of employees is well and truly working.

Q4030 Lord Turnbull: Even at trader level, when recruiting, you are checking whether there is any record?

Peter Nielsen: Absolutely.

Chair: That is helpful.

Q4031 Mark Garnier: I have two very quick questions. I will start with you, Mr Nielsen, but I would like an answer from all of you. When were you first aware of the investigation into the LIBOR scandal?

Peter Nielsen: I was made aware when we received the document from the CFTC in April 2010.

Johnny Cameron: I read it in the newspapers, but I do not recall when.

Q4032 Mark Garnier: Have any of you been interviewed by either of the regulators on this?

Johnny Cameron: I have not.

Peter Nielsen: I have had input into the FSA’s investigation. I have personally been investigated by our legal team, which went through all the e-mail trails for LIBOR suppression and everything else. That has been fed into the FSA process.

Q4033 Mark Garnier: But you personally have not had any sort of conversation with either of the regulators on this?

Peter Nielsen: On that subject with the investigators, no. I see the FSA routinely, but not on that subject.

Q4034 Chair: While we are on the subject of investigations, you were investigated by the FSA after you left in March 2009, weren’t you?

Johnny Cameron: It was a one-year investigation that started about then.

Q4035 Chair: Was that part of a wider investigation already being conducted by the FSA?

Johnny Cameron: No. When I left the bank, the FSA made it clear that I would be able to work somewhere else, but when I actually applied for a job somewhere else in March ’09, they decided to launch an investigation into me.

Q4036 Chair: Was it your impression that that was part of a wider investigation into RBS? Or was that the initiation of it?

Johnny Cameron: No, I am pretty clear that it was entirely about me.

Q4037 Chair: Did you have a sense that they were on the case in a big way at that time into why RBS had failed?

Johnny Cameron: No, I think they were looking into me.

Q4038 Chair: Just you?

Johnny Cameron: That is my clear understanding.

Q4039 Chair: While we have you here, may I take you back to when you were still at the bank at, or pretty close to, the peak of the crisis in mid-September 2008? Did senior management at any time discuss the scope for altering submissions to the LIBOR market?

Johnny Cameron: No, we did not discuss that, but we did discuss the LIBOR market. Brian Crowe, who was chief executive of the investment bank, was also chairman of the BBA wholesale committee responsible for LIBOR and, therefore, both in that capacity and he and I in our capacities of having been major interlocutors with the FSA and the Bank of England on the dislocation in the money markets through August and September 2008 brought to the regular 9.30 morning meeting reports of the dislocation in the money markets.

Q4040 Chair: Was it a conference call?

Johnny Cameron: There was a morning meeting every morning at 9.30 led by the group chief executive.

Q4041 Chair: Fred Goodwin.

Johnny Cameron: Indeed. And it linked to Edinburgh and London, typically on video.

Q4042 Chair: Who would usually be on that? Were you on that, Mr Hourican?

John Hourican: No.

Q4043 Chair: Were you on that, Mr Nielsen?

Peter Nielsen: No.

Johnny Cameron: It was the group executive committee.

Q4044 Chair: So just the most senior people?

Johnny Cameron: About 13 or 14 people. Something like that.

Q4045 Chair: Was there any discussion at those meetings on whether to publish a favourable LIBOR rate?

Johnny Cameron: No, I do not recall that.

Q4046 Chair: Was there ever an exchange between Fred Goodwin and Mr Crowe on the importance of trying to maintain the integrity of the LIBOR rate?

Johnny Cameron: There was a discussion about how LIBOR was fixed, and the process, and the fact that, as was being reported in the press at the time, there was dislocation in the markets, and the level of LIBOR was increasingly hard to establish, and Fred and Brian had a discussion on one occasion about that process.

Q4047 Chair: Just be a bit more frank about this discussion, if you can remember it.

Johnny Cameron: I think what you are referring to is a discussion in probably late September 2008, when we were all getting pretty tense, to say the least, and there was a pretty frank exchange of views, when Brian basically said-how do I put this?

Q4048 Chair: Put it how it was.

Johnny Cameron: Yes, I know, but it is quite hard to remember five years ago, Chairman. There was a frank exchange of views where Brian felt that-it was a difficult, technical subject that I think perhaps Brian didn’t feel Fred fully understood the complexities of, and he told him so.

Q4049 Chair: And what was Fred Goodwin suggesting?

Johnny Cameron: He wasn’t suggesting anything. He was playing around with ideas, and really trying to understand how it actually worked-that was really what was going on.

Q4050 Chair: While you are here, I’d like to ask you another question, Mr Cameron. RBS’s failure had a lot to do with over-reliance on commercial property; you had a hand in generating that over-reliance. Why is it that banks are incapable of learning from the mistakes of the past? You were at that time old enough to remember the last property crash, and the property crash before that.

Johnny Cameron: I was, yes.

Q4051 Chair: Yet you were using property as core collateral for so much of this lending.

Johnny Cameron: If you think about the option of would you rather lend to Woolworths unsecured, or would you rather lend to the owner of the shop that is rented to Woolworths, I think there is a very legitimate argument that says "I would rather lend to the owner of the shop that is rented to Woolworths, so that when Woolworths isn’t there I can at least rent it out to someone else"; and there are a lot of features of commercial property that are attractive security for a bank.

It is also the case that one of the lessons that we learned was that in the early ’90s inflation pushed interest rates up very high and a lot of the lenders to property got into trouble then, because the high interest rates overburdened the borrowers; and for that reason swaps were put in place, typically. So that particular problem did not arise. Of course, you are always fighting the last war, and in this particular case interest rates collapsed, which caused the opposite problem for those who had taken out fixed-rate swaps. So a lesson was learned-the dangers of having unhedged exposure to interest rates for lending to property; but the conclusion that was drawn proved not to be very helpful.

Q4052 Chair: Of course, at the moment everybody thinks they have learned the lessons. Do you think the regulators will be any better than bank boards at spotting asset price bubbles?

Johnny Cameron: Gosh, Chairman, I’m sorry; I don’t know that I have a view on that. What I do know is that-

Q4053 Chair: That is what the new system embodies; I think it is in the plans for counter-cyclical macro-prudential tools.

Johnny Cameron: Again, I do not wish to be too philosophical, and I am sure you would say I would say this, wouldn’t I, but in 2007 almost everyone agreed with me, and whether it was regulators, press, members of this-

Q4054 Chair: So you are not optimistic.

Johnny Cameron: I think the job of regulators is to lean against the wind, and the question is to what extent, I guess-in the sense, can they actually stop someone doing something, as opposed to advise them not to do something.

Chair: My last question is for you, Mr Hourican. Your assistant is going to remain in the bank; your boss is going to remain in the bank; but you appear to have been the human shield who has taken the hit. Is that how you feel?

John Hourican: I think one of the more difficult moments of leadership is when you have to do what you say. I have always said to our people that sometimes you have to stand in front of your business and take responsibility for things that occur within it. We have to do so in a proportionate way. Given the sheer size of the anger around this from every constituency and given my assessment of the risks to the bank in the various departures of others, I think this is the right thing to do for the bank, and therefore the right thing to do for me, because I must live by the principles I adopt.

Q4055 Chair: And you specifically agree with the conclusion that it should not be your deputy or your superior but you who takes that hit?

John Hourican: Yes. I think the bank is better served by those individuals remaining in post.

Chair: Thank you very much for giving evidence this afternoon; it has been extremely interesting. We will now go into private session for 15 minutes, and then we will resume.

On resuming-

Examination of Witnesses

Witnesses: Sir Philip Hampton, Chairman, RBS Group and Stephen Hester, Chief Executive Officer, RBS Group, examined.

Chair: Thank you for coming in this afternoon. We have quite a lot to get through, so we will begin straight away and open with a few questions that derive directly from the previous session, at least part of which, I understand, you had the opportunity to see or hear. I hand over to Rory Phillips.

Q4056 Rory Phillips: I would like to ask you some questions about LIBOR, and the details that emerged last week in the FSA report and in the order of the American regulator, the CFTC. I note first that in a message to your staff last week, Mr Hester, you said that you and the chairman "will not be ducking the difficult questions that come our way." The first question I have for you, whether difficult or not, is this: Mr Hourican, in his statement to staff said that the conduct of those involved in the manipulation was "disgraceful" and had "brought shame" on the bank-do you agree?

Stephen Hester: I agree with that.

Q4057 Rory Phillips: The reputational damage that this has caused the bank has been considerable, has it not?

Stephen Hester: It has.

Q4058 Rory Phillips: No doubt that will continue. It is something that you will have to keep an eagle eye on in the months and years ahead. Is that fair?

Stephen Hester: That’s right, yes.

Q4059 Rory Phillips: There is a risk, obviously, of loss of confidence, but also of loss of trust in you on the part of your customers and the public. Is that fair?

Stephen Hester: That is absolutely right.

Q4060 Rory Phillips: So far as that is concerned, you became the group chief executive in the disastrous failure in about October 2008. Is that right?

Stephen Hester: The weekend of the recapitalisation by the state, I was asked by the board and the Government to do it. I was not actually freed by my previous company, where I was chief executive, until the end of November.

Q4061 Rory Phillips: Thank you. The events described in the two notices-the FSA and the CFTC-continued, didn’t they, in terms of misconduct, until the summer of 2011?

Stephen Hester: That’s right.

Q4062 Rory Phillips: So, just doing the maths, two and half years after you had taken over.

Stephen Hester: That’s right.

Q4063 Rory Phillips: In terms of management failings-again, identified and criticised by the FSA-they continued, didn’t they, until March last year, 2012?

Stephen Hester: That is the FSA’s finding. The position of cleaning up from LIBOR, in some ways, still goes on. The regulator’s first report into what would constitute good LIBOR setting was the Wheatley report of September, which all banks are implementing now. So, in some ways, you could say it is a longer time period.

Q4064 Rory Phillips: But in terms of the matters relied upon-the matters for which your bank received a gigantic financial penalty-they extend, don’t they, until March 2012?

Stephen Hester: That was the FSA’s finding. Yes, that’s right.

Q4065 Rory Phillips: So again, just doing the maths, it was a considerable period after you took over as group chief executive. Many of the failings identified in the report were failings, weren’t they, of management?

Stephen Hester: I think that the behaviour, obviously, was the disgraceful failings of individuals and, I would say, the broader failing of a banking culture, of which that was an extreme example. But nevertheless, I don’t think one can attribute it narrowly. In addition to that, RBS-probably lots of other banks, but in the case of RBS-had significant failings of control and process over the behaviour of those individuals.

Q4066 Rory Phillips: That makes up a very considerable amount of the FSA report, doesn’t it? The failure of control, the failures of risk, and the failures of management generally to get a grip on the problem-that is a fair summary, isn’t it?

Stephen Hester: That’s very fair, yes.

Q4067 Rory Phillips: Thank you. And it makes it particularly disgraceful that this sort of conduct and these sorts of failures were going on, doesn’t it, when you were recipients of a gigantic amount of public money? We were told earlier that you are 83%-owned by the taxpayer.

Stephen Hester: I think that certainly adds to it, although it would have been wrong in all circumstances.

Q4068 Rory Phillips: Yes. So far as the witnesses who have just given evidence to us and the lower levels of management are concerned, they freely accepted that there had been what they called disastrous failures of management over a period of about three and a half years and that management was very, very slow to get to grips with the problems that have resulted in these very serious penalties. Is that a description that you, Mr Hester, would also accept?

Stephen Hester: I think that we were slow to recognise that behaviour and to, if you like, catch it. It speeded up considerably once we were aware.

Q4069 Rory Phillips: When were you first aware of it?

Stephen Hester: The actually wrongdoing that was discovered: not until soon after it was discovered in the spring of 2011. The CFTC investigation into suppression, which was something that obviously other banks had been found guilty of but we did not find evidence of, began earlier the previous year. I was aware of it the previous year.

Q4070 Rory Phillips: Are you saying that you were first aware of that interest when the CFTC became involved in April 2010?

Stephen Hester: I do not recall whether it was precisely April, but I was certainly aware soon after the CFTC became involved.

Q4071 Rory Phillips: One of the very serious criticisms made of the management of the bank is that the misconduct was permitted to continue despite the fact that the CFTC was investigating. Do you accept that criticism?

Stephen Hester: I think that must be right.

Q4072 Rory Phillips: So far as what happened after you became aware in April 2010, to whom did you report as the investigation conducted by Clifford Chance took place?

Stephen Hester: The investigation was primarily undertaken, as befits the nature of the allegations, by the independent line of our general counsel and risk apparatus, and indeed outside counsel. They reported to management, but specifically also up the line to the board via the group audit committee.

Q4073 Rory Phillips: The group audit committee. Was the group finance director involved in their reporting?

Stephen Hester: The group finance director is a member of the board and attends group audit committee meetings, although he is not a member of the group audit committee. Internal audit reports to the group audit committee and secondarily to the group finance director.

Q4074 Rory Phillips: Would it be fair to assume that, from the moment of their involvement in April 2010, there was regular reporting up to board level-to the board audit committee-about the emerging findings of the investigation?

Stephen Hester: As I mentioned, the first findings of wrongdoing were in the spring of 2011. The fact that a CFTC review or investigation was going on was reported to the group audit committee and the board. The board in December, I believe, 2010- I think the first time the group audit committee heard something about it was September, but at that stage, it was an investigation as opposed to any uncovering of wrongdoing.

Q4075 Rory Phillips: It was a very large investigation. We have heard, for example, that by February 2011, some 2 million documents had been handed over to the investigators. We know that in that same month-February 2011-the bank was asked by the FSA to provide an attestation. Were you aware of that process at the time it was going on?

Stephen Hester: I do not think so.

Q4076 Rory Phillips: Are you aware now that the attestation was provided by the bank in March 2011 by the group treasurer?

Stephen Hester: Yes, I am.

Q4077 Rory Phillips: We understand from the evidence given before you arrived that he remains in his post.

Stephen Hester: Yes, he does.

Q4078 Rory Phillips: That attestation was severely criticised by the FSA, wasn’t it?

Stephen Hester: It was.

Q4079 Rory Phillips: Did you take any part in the process of drafting the letter?

Stephen Hester: I did not.

Q4080 Rory Phillips: Are you aware who did take part in the process of drafting that letter?

Stephen Hester: I am not specifically, but what the letter says-I think you have copies-is simply that he provides the attestation based on the internal audit report you mentioned, so that was the, if you like, basis of the report, which should have been a responsible thing to do. As it turned out, obviously, it was wrong.

Q4081 Rory Phillips: Yes. So far as that process is concerned, based on the way in which the bank’s structures usually work, would you have expected the group audit committee, who you have already mentioned, to have been involved in the production of that letter.

Stephen Hester: The group audit committee would normally be involved in internal audit reports that find significant negatives. There is a grading system for audit reports, so the group audit committee would normally just review the ones with poor findings. This one-wrongly, as we subsequently found out-was not graded as a big fail, or something like that. In the instance of an audit report that finds only small things to fix, normally that would not be specifically brought to the attention of the group audit committee.

Q4082 Rory Phillips: But are you able to say in this case whether it was or not?

Stephen Hester: As far as I am aware, it was not.

Q4083 Rory Phillips: So because of the inadequacy of the group audit report, as it turned out, the group audit committee on the board did not learn of what was going on?

Stephen Hester: The first time that the company learned of the wrongdoing was in the spring of 2011, and I believe it was then promptly drawn to the attention of all levels of management board and audit committees. But prior to that, there was no knowledge in the company.

Q4084 Rory Phillips: You say spring 2011, but the letter was written in March 2011. Are you saying that the bank became aware of that wrongdoing before the letter was written?

Stephen Hester: No, I am saying the opposite. At the time when the letter was written, there was no knowledge of wrongdoing that had not been found, so there was no wrongdoing to communicate, at least in the knowledge of internal audit or anyone else. At the point when that was known, which I think was a handful of weeks after the audit report, it was promptly drawn to their attention: the e-mail was read out to the board and various other things. I think at the point when people knew there was wrongdoing, there was prompt escalation to the very top of the company, but of course we did not know until later than was desirable.

Q4085 Rory Phillips: Can you remember roughly when that process took place-the communication to the very top of the company?

Stephen Hester: In spring 2011. As I said, the communication that the CFTC investigation was going on earlier, but at that stage the investigation was not finding any evidence of suppression, and has not to this day. It was not until we moved on to the smaller currencies-obviously the yen is a large currency, but smaller for us relative to dollars and sterling-that the wrongdoing was uncovered.

Q4086 Rory Phillips: But the bottom line, so far as the FSA report and management failings are concerned, is that from the moment of the attestation to the moment the FSA identifies you correcting the systems failures that it set out took about a year.

Stephen Hester: That is what the FSA report says.

Q4087 Rory Phillips: Yes. Do you disagree with it?

Stephen Hester: As I mentioned earlier on, I think there is a gradation. The most serious failings were fixed within a handful of weeks. Different levels of improving a LIBOR process are going on to this day across the industry, and the FSA is specifically critical of the period until March 2012.

Q4088 Rory Phillips: So far as Mr Hourican is concerned, his departure was announced at the same time the bad news was announced by the FSA and the US regulators. What we learned earlier this afternoon is that his immediate junior, Mr Neilsen, remains in post. That is correct, isn’t it?

Stephen Hester: That is correct.

Q4089 Rory Phillips: And it will fall to him, with a colleague, to take forward the senior management of that part of the bank. Is that right?

Stephen Hester: It is correct, but perhaps I could elaborate. The front-line part of the business is being co-headed. Peter’s prior job has effectively been divided into two, with him and Suneel Kamlani as co-heads of that business going forward. Of course, all along and still today, in addition to what we would call the first line of defence in these terms, there is an independent risk function and an independent audit function, as we know, both of which did not catch things in this instance and both of which need to be improved, along with much else at RBS.

Q4090 Rory Phillips: So far as Mr Hourican is concerned, you described his behaviour in a public statement as being like that of the captain on the bridge. As he explained to us, it was a question of standing out front and taking responsibility for the serious management failings revealed by the FSA report. Ultimate responsibility in terms of management rests with you. Are you accepting responsibility for the management failings set out in the regulator’s reports?

Stephen Hester: I have been the captain on the bridge, as you point out, since the end of November 2008, and am, therefore, responsible for all the things that go on at RBS. They might not be of my making but, obviously, they are on my watch.

Q4091 Rory Phillips: Were you involved in discussions with Mr Hourican about whether he should go?

Stephen Hester: Yes, I was.

Q4092 Rory Phillips: Were other members of senior management?

Stephen Hester: Senior management, no, but it was extensively discussed with the board, and obviously with my chairman the most within the board.

Q4093 Rory Phillips: At what point was it decided that where he should go-Sir Philip, this is a question for you-Mr Nielson should remain?

Sir Philip Hampton: Pretty much simultaneously. The reports had established that neither of those men had had any direct culpability or direct association with any of the wrongdoing, but the board certainly thought that it was appropriate for senior accountability to be taken.

Q4094 Rory Phillips: Mr Nielson was also a very senior management figure in the relevant part of the bank where things went wrong and indeed, as he has explained to us, he had been global head of rates at a time when the manipulation was taking place. Why was it not thought appropriate by the board that he should take responsibility in the same way as Mr Hourican?

Sir Philip Hampton: I think he does have accountability and responsibility for precisely the reasons that you describe, but he had no direct culpability. We think, even to this day, that a single point of accountability is what is necessary and not a series of assassinations.

Q4095 Rory Phillips: Forgive me but that does not make sense either. He also explained that junior managers, still senior in the organisation, had left. With Mr Hourican going at the top, with them below Mr Nielson also going in the aftermath of this scandal, how is it that he in the middle has managed to survive? What is the logic?

Sir Philip Hampton: The logic is that we think that at that level-the people you are talking about are a good way below and plenty of them, or some of them, had direct association with the wrongdoing-at the most senior levels of management within the GBM, the markets business, we thought that one person should take primary accountability for all the series of wrongdoing, and that person should be John Hourican.

Q4096 Rory Phillips: The final question that I have for both of you is that in the light of the management failures, which are outlined in these reports and which took place when you were both in post at the bank, what can you tell the Commission to assure the Commission that the mess will be cleared up and, in so far as you can, assure us that there will be no repeat of the misconduct and the management failures set out in the reports? Perhaps you would like to start, Mr Hester.

Stephen Hester: I guess what I can say is that from the very beginning, up to and including today and for so long as I am in post, I will do my absolute best to rescue the position at RBS and make it a better institution and that would most definitely include trying to eliminate control and reputational failures of this kind. I think it is impossible to give absolute assurances. Indeed the mess that RBS represented is not yet cleared up and there are still some hard yards to travel, but I can give you my assurance that we are doing our best.

Sir Philip Hampton: We have a major programme of control, remediation and improvement right across the group, but specifically concentrated in the markets business. LIBOR is an egregious example, but it is not the only example of control failings in that business. I am sure that that is the case in other markets business, particularly in the turmoil of recent times. It is a very big programme; it will not be done overnight, but, as Stephen says, from the board down there is phenomenal focus on getting the markets control and remediation programme and culture in the right place, and it has not been in the right place.

Q4097 Baroness Kramer: I wonder whether you can help me, Mr Hester, because I am somewhat confused over the attestation and the role of the audit and the role of the group treasurer. The FSA wrote to the group treasurer, did he not, in a letter dated 10 February 2011 requesting, in effect, the attestation, and the subject of that attestation was LIBOR. Were you aware of that letter?

Stephen Hester: I was not.

Q4098 Baroness Kramer: You were not aware of that letter. So within the chain of command, who would have been aware of that letter other than the group treasurer?

Stephen Hester: I am afraid that I do not know specifically. I would have expected the relevant bits of the business to be aware. Of course the group treasurer-properly, although, as it turned out, unfortunately-sought independent assurance of the independent line of checking, in terms of internal audit, so, clearly, they were involved in that process.

Q4099 Baroness Kramer: Audit would have reported that up to what level?

Stephen Hester: The audit department, as I mentioned, reports to the chairman of the audit committee and also to the group finance director, but the escalation of individual things depends on what is found, so I would not have expected in this instance, given that the audit department missed that there was anything wrong, that they would have escalated it to the group audit committee.

Q4100 Baroness Kramer: Just the fact of requesting an attestation would not have triggered the bell sufficient that, within your management structure and the kind of management priorities that you would expect your officers to have, for this to be taken to any level other than, essentially, the person who received the letter and whomever they chose to consult.

Stephen Hester: There are many occasions in a bank when regulators ask for representations on different subjects, and I guess those are typically escalated when people judge that there is a severity or issue to deserve escalation. Normally, if you like, the principle within the bank is that you have four or more eyes-in this case, you had not only the business but the independent line of control in audit, which considered that there was not something wrong. Obviously, as I say, it is an example of how RBS had many dimensions of its control environment that needed to be improved, but I think this was not an issue of conspiracy or people knowing something was wrong and deliberately failing to escalate or come forward with it.

Q4101 Baroness Kramer: So the group treasurer, as an individual, and audit would have been the two bodies responsible to provide an accurate attestation.

Stephen Hester: The business itself I am sure would have been involved but, obviously, the point of involving group audit is as an independent line of defence. If the business is being asked to comment on itself, you could be open to criticism that if something was wrong it might not realise it or confess it and, hence, the involvement of group audit in this issue.

Q4102 Baroness Kramer: As you know, the letter itself-it is a very brief letter from the group treasurer-refers to the group internal audit and says: "thus on that basis I confirm that RBS has in place adequate systems and controls". Now, we know that that was not true, and that was not true when that letter was written. Of course, a phrase like "on that basis" is a tremendous out. Would it not be part of the responsibility of the group treasurer to be aware of the scope of the audit?

Stephen Hester: The group treasurer would have been aware of the scope of the audit in the sense that the audit had agreed terms of reference and then there was an audit report that had findings, set against those terms of reference. What was not on people’s radar screens at the time-wrongly, as we know now-was, if you like, the malfeasance or the wrongdoing aspect of it, so I think that the group treasurer was responsible in asking for the independent line of defence to produce a report, and was responsible to rely on that report. As it turns out, the report was misleading to him and to the rest of us.

Q4103 Baroness Kramer: Perhaps I am not being clear, but you are really stretching credulity, I think, as you probably recognise, Mr Hester-with the CFTC, frankly, all over the bank, requesting some 2 million pages of documents, with the various stories that have been in the newspapers since 2008, with the requests from the BBA and now with the letter from the FSA. I wonder if you have been able to take a look at the actual terms of reference that were used. Internal audit was involved in a box-ticking exercise, was it not? The group treasurer would have been aware, looking at the language provided by audit, that it was an exercise in looking simply at whether people had signed various pieces of paper or had been given various authorisations. It did not actually look to see what was going on in this area.

Stephen Hester: I think it is absolutely true, with hindsight, that that report did not uncover the things we wish it would have done, and it may well have not gone into the detail-in fact, it did not go into the detail-that would have been required to uncover those things. And that is one of the reasons why, in assigning accountability and blame within the company, there are some disciplinary actions that have taken place in relation to group audit in addition to the actions in relation to the front line.

Q4104 Baroness Kramer: I have just one last question. Obviously, Mr Hester, at various times when you have come before this Committee you have talked about the change of culture at RBS. However, if that change of culture cannot even persuade audit to examine the details of a circumstance that was widely paraded in the press and that is already involving two major regulators, with extensive interviews within the organisation, how do we come away with any confidence that that cultural change is now somehow meant to be embedded?

Stephen Hester: I understand completely and I feel just as anxious about it-probably more so-because every day I live with the risk that we haven’t found things. We knew when we took on the task of turning RBS around that we would not find everything straight away and that we would not fix it straight away when we found it. And one of the really worrying aspects was that RBS’s mistakes were not just business mistakes or cultural mistakes that were made on the front line but that RBS’s systems of controls were not up to snuff.

One of the difficult things we have had is, how fast can you change things? So, for example, in the case of internal audit the changes that we have made to personnel we made more slowly than the changes we made in personnel on the front line; I know that you had Mr Cameron here earlier on as an example of that. That is because we were going through an exercise of prioritisation of change in the face of the meltdown. I wish that we had been able to discover everything quicker and change it quicker, but that was the way that we were doing it.

Q4105 Baroness Kramer: Would change have come faster if you had asked Mr Cummins to take responsibility for his signature on that letter?

Stephen Hester: I personally think that it was responsible for Mr Cummins to sign that letter, based on the internal audit report, and I think that he was as let down as you or any of the rest of us by the failure of the internal audit report to catch it. All of that said, and as I say, I think an internal audit was one of the many things that RBS needed to be strengthened-it still is, and we are strengthening it-but, that said, it took 11 million documents, or whatever the number is, to discover this wrongdoing. It was not that easy to discover it; it took a long time-

Q4106 Baroness Kramer: You are saying that that is because this was hard to find, but is not that because the focus of the CFTC was on US LIBOR? The audit group-that, and presumably your management responsibilities-covered the entire breadth of LIBOR, including what you describe as the yen as a lesser currency. So I am finding it hard to believe that, because the CFTC was focused on something, you feel that that is a rationale for audit not to look at the other areas of the business where blatant behaviour was taking place.

Stephen Hester: No, I think the internal audit report was deficient.

Q4107 Chair: Sir Philip, I would just like to clarify, or take a step further, one or two of the answers you gave Rory Phillips. You said some of the people below Mr Hourican who would have been involved in the wrongdoing had gone, but therefore it must follow that some people who were not involved in the wrongdoing have also gone.

Sir Philip Hampton: Yes, they have gone for different reasons. I think that you heard earlier that some people have retired, some people have left the bank to pursue other interests-

Q4108 Chair: But you have asked some people to go?

Sir Philip Hampton: And we have asked some people to go, yes.

Q4109 Chair: Right. So you have asked some people to go who are not directly implicated in the wrongdoing, below Mr Hourican. Correct?

Sir Philip Hampton: Yes.

Q4110 Chair: Right. And you have asked Mr Hourican to go, but you have not asked Mr Nielsen to go.

Stephen Hester: Could I possibly answer, because I have been closer to some of this than the-

Chair: I will come to you in a moment, Mr Hester, if I may. But I would just like Sir Philip, since he began with this line of reply, to respond.

Sir Philip Hampton: There are a variety of reasons for a variety of changes. We were very clear, and this was all before LIBOR became a big public issue. The people who were most directly associated with wrongdoing-direct culpability associations of writers of e-mails, the traders-were pretty much summarily dismissed way back in 2011. Then you have other gradations of what people clearly should have known, although they appeared not to have known, and then you go up the management chain and you make harder and harder decisions. Of course eventually you end up with me, or you certainly end up with Stephen and me, in terms of accountability.

What we decided was pretty brutal action in relation to those directly associated, as I say, and a whole range of different judgments for other people. The biggest judgment we made was that even though John Hourican had no direct association with this, we thought that for an issue of this seriousness, there had to be a serious, senior, captain-on-the-bridge departure. It was very difficult for John, but that’s what we eventually decided. We did not make the same-

Q4111 Chair: So he really was a victim, tossed overboard.

Sir Philip Hampton: No, we think that appropriate accountability is sometimes necessary in all walks of life and certainly in business.

Q4112 Chair: We’ll just have one more go. What we are not grasping is why the accountability line appropriately ran to him but not to Mr Nielsen when it ran not only to Mr Hourican but to the people beneath him, some of whom were also not directly involved in the wrongdoing.

Sir Philip Hampton: Because he is the captain on that particular bridge and Peter Nielsen is not the captain on that particular bridge.

Q4113 Chair: Well, he was captain of a heap of things which he agreed should have been in better shape and would have helped hugely had they been in better shape, in the last session.

Sir Philip Hampton: I’m sure. I know you’ve heard from Peter Nielsen himself. He regrets that he didn’t take more decisive action in a whole variety of ways. So he will receive some discipline, if you like. He’ll have bonuses clawed back, and other aspects of his life will change. But we would like to keep him in post.

Q4114 Chair: But we are relying on a man whose shortcomings were pretty manifest in this episode.

Sir Philip Hampton: I’m afraid we’ve all got shortcomings.

Q4115 Chair: Mr Hester, you wanted to add something.

Stephen Hester: I simply wanted to clarify that, with respect to the more junior people that you were asking about, which I was more closely involved in than the chairman, the approach that we took was that the immediate layer of supervisors, who, the findings were, knew nothing but nevertheless were close enough and it was legitimate for us to say they should have known, needed to leave the bank. So if you like there was who was involved; then, at what point do you think someone should have known? And then after that, you moved into different territory, which was the captain-on the-bridge discussion that Philip has been covering.

Q4116 Chair: Well, we’ve had a canter round that point. Mr Hourican has paid a very high price-he has paid with his job. Don’t you think, Mr Hester, there’s a case for saying you should pay with your bonus?

Stephen Hester: I think that my bonuses should be assessed on all of the things I do well and badly and judgment should be reached in the round. Obviously, it’s not me that makes a judgment; it’s the chairman and the board.

Chair: No, but I was asking you for your view and I will carry on asking-I’ll bring you in in a moment, Sir Philip, not now.

Sir Philip Hampton: Thank you very much.

Q4117 Chair: Your view is that you shouldn’t pay a price with your bonus.

Stephen Hester: I think that in-if you look at the RBS that we took on four years ago or so, we have done huge things to rescue a situation for the company and for society and for its different stakeholders, which include hundreds of billions of pounds of risk that the country was exposed to that it isn’t exposed to any more. So I think that it is entirely proper for me and the board and the management team to be assessed on the things that we have done and the things we have not done, and I believe that this nation is off the hook of a lot of bad things, but not yet all the way off the hook, and there was never any prospect that we could have discovered everything immediately or fixed everything immediately, but we must of course be accountable for the balance of what we discovered and what we fixed and in what period.

Chair: Do you accept, Sir Philip-

Sir Philip Hampton: Can I add something-

Q4118 Chair: In a minute. I would like to pursue this line of questioning for a moment with you. Do you think, Sir Philip, that it is important that staff in an organisation as a whole accept responsibility and, in some cases, penalties for misdemeanours, even though they might not have been immediately involved in them?

Sir Philip Hampton: Yes, very much so.

Q4119 Chair: Why is it, then, that you think that Mr Hester’s bonus should not be cut as a consequence of what he himself has described as a failure on his watch?

Sir Philip Hampton: Because I think we are looking at it over a longer period of time, essentially. I don’t think it is hyperbole to say that Stephen is doing one of the most difficult, challenging, demanding jobs in world business, probably, because RBS was the biggest banking failure in the world and Stephen took it on at an exceptionally difficult time. He has also, in his four years in charge, been paid well below the market rate for a job in world banking-and for one of the most challenging, or the most challenging.

Q4120Chair: Could you remind the Commission what Mr Hester’s total remuneration was last year?

Sir Philip Hampton: Stephen’s basic, I think, is £1.2 million a year, and then he has a pension contribution of £400,000 a year, or thereabouts. It is a highly paid job.

Q4121 Chair: And the bonus will be?

Sir Philip Hampton: Potentially twice salary-

Q4122 Chair: Some £2.4 million.

Sir Philip Hampton: Yes, and an LTIP, which can be three and a half times salary. These are very large amounts of money, none of which-

Q4123 Chair: Which can be how much?

Sir Philip Hampton: Three and a half times salary.

Q4124 Chair: Each year.

Sir Philip Hampton: Each year, yes; none of which, I hasten to add-

Q4125 Chair: So it is three and a half times: it is about-a little under 5. About 5.

Sir Philip Hampton: Yes, none of which, I hasten to add, has triggered, so these are theoretical amounts, which Stephen has not received anywhere remotely close. So he has been doing one of the most challenging jobs and he has been one of the least well paid. Now, these are still very large amounts of money, clearly, by most standards, but relative to other people doing these jobs his pay has been modest, relatively.

Q4126 Chair: You are going to, Mr Hester, claw back part of the total fine, and the UK part of the fine, from the bonus pool. That is correct, isn’t it?

Stephen Hester: That is correct.

Q4127 Chair: The published total variable compensation last year, for the most recent data available-2011-is £785 million. I think that is correct, isn’t it?

Stephen Hester: That sounds roughly correct. I am afraid I don’t have the precise number at my fingertips.

Q4128 Chair: And you will be publishing your results in March, so you are presumably very close to, or in discussions about, bonuses now.

Stephen Hester: That’s right.

Q4129 Chair: So you will have decided what the size of the new bonus pool is.

Stephen Hester: The remuneration committee, which I am not a member of, of the board-

Q4130 Chair: You as a company decided-

Stephen Hester: Yes, the remuneration committee of the board finalises those decisions immediately before the results are announced in a couple of weeks’ time; so yes, discussions are well advanced, but they won’t be finalised until that date, and of course they will then be released in the normal course, with all the different data that comes out on this issue.

Q4131 Chair: I just want to be clear so that we can identify the base line, from which the £300 million will be subtracted. It wouldn’t be reasonable for it to be £785 million, would it, because the whole industry has seen reductions in bonus or incentive payments this year, roughly of-challenge me if you think I am wrong-around 20%.

Stephen Hester: The £300 million is planned to be-

Q4132 Chair: I just want to be clear on that point-broadly speaking.

Stephen Hester: I will try and answer your question. The £300 million is planned to be some combination of current year bonus reductions, prior year bonus clawback, prior year long-term incentive clawback and a smaller element of future year. The baseline-

Q4133 Chair: Before we go any further, I think it would be very helpful, when you take this decision, if you set it out, to identify it.

Stephen Hester: We will certainly do that. It will be very easy to add it up-or we will add it up for you, put it that way. The baseline on bonuses-

Q4134 Chair: It is not easy for us to disaggregate unless you tell us where it is being disaggregated, and that is what we are asking you to do. A slightly tougher job.

Sir Philip Hampton: It will be transparent.

Stephen Hester: The baseline on bonuses is again a judgment made by the remuneration committee, not me, but of course I am involved in the discussion, which takes account of two things: first, the specific performance of the people and businesses concerned; and, secondly, the industry context. As you know, Deutsche Bank, Union Bank of Switzerland, Barclays and various other banks measure their bonus pools in the billions. At RBS, it is a lot smaller than that, but of course we will give proper disclosure on the small number of big-

Q4135 Chair: Coming back to the question I asked, the bonus pool was £785 million. You are agreeing that the total pool would, in any case, have fallen, if not in line, certainly in response to the fact that the industry generally has reduced its bonuses. I am asking you for that element of the bonus pool that is attributable to 2012.

Stephen Hester: We will give full disclosure.

Q4136 Chair: It will not be possible to get full disclosure unless I get this number out of you now, Mr Hester. I would like you to tell me, broadly speaking, how much you think your bonus pool should have fallen any way.

Stephen Hester: I do not know the answer to that because it is counterfactual: the remuneration committee did not decide. Different businesses-

Q4137 Chair: You would have had to think about it any way, wouldn’t you?

Stephen Hester: We are talking about the markets business, and the nine-month results that are public at the moment-the last three months are not public-have profits substantially ahead of the prior year. When we give the £300 million number, however, we are not taking account of that substantial extra profitability, but it should be noted that the profits of the business pre-LIBOR fine were substantially up as of the period that has been revealed so far.

Q4138 Chair: We would like you to publish what the bonus pool for 2012 would have been in the absence of this reduction.

Stephen Hester: We can certainly say what it would have been had bonuses as a percentage of profits been unchanged. The counterfactual of what we actually would have paid will always be unknown, because the remuneration committee never had that proposition.

Q4139 Chair: The remuneration committee was very near to that proposition any way. After all, this is a judgment that has just been made. Sir Philip, you are smiling broadly, and I am not surprised. Maybe I could ask you to deliver this to the Commission.

Sir Philip Hampton: I am just reciprocating your smile, Chairman.

Q4140 Chair: What is the response to my question? Will you deliver it, please?

Sir Philip Hampton: No, we have not decided on our bonus pool yet. We are pretty close to doing so, but we have not decided. One of the things that have come relatively late in the day is this notion, which came from the Chancellor, that we should claw back the American aspects of the fine. We were going to make significant clawback any way in relation to LIBOR, but the Chancellor said, "So far as the UK taxpayer is concerned, he thinks we ought to make sure that we claw back everything that is going to leave this country." That is what we are working on, which is basically where the £300 million derives from, and exactly how we get there we are still finally determining.

Q4141 Chair: How much has the headcount shrunk over the past 12 months?

Sir Philip Hampton: In the markets business or generally?

Q4142 Chair: In RBS.

Stephen Hester: I would have to come back to you with the exact figure.

Q4143 Chair: But there is a figure that you are going to give us?

Stephen Hester: Yes.

Q4144 Chair: Does that mean that, per capita, bonuses would rise any way?

Stephen Hester: In the case of the markets business, the headcount shrinkage in the past year was pursuant to strategic decisions we announced a year ago. The overwhelming majority of the people leaving were not given a bonus in any event in the prior year comparison.

Chair: On the basis of what you have told me this afternoon, I am not sure exactly how much substance or weight we should attach to the fine-looking claim that the £300 million of bonuses will be fully clawed back, but let us see what you publish.

Q4145 Mr McFadden: Sir Philip, I have a final question on this. You said a moment ago that the Chancellor had asked you to ensure that the US portion of the fine will be paid out of the bonus pool. Why only the US portion? Do you think our constituents will be any happier effectively footing the bill for the UK portion of the fine?

Sir Philip Hampton: The Chancellor was anxious about all of this, of course, and he was certainly anxious that the bankers should bear some responsibility financially for these enormous fines. He was less concerned about what he described as the internal circulation of money from an 82% taxpayer-controlled organisation paying a fine to the FSA, so in a sense it’s locked into the national finances-

Q4146 Mr McFadden: Are you concerned about this?

Sir Philip Hampton: No, we were concerned to make sure that we had the maximum possible clawback consistent with still keeping a stable business and still keeping people incentivised and retained. But the numbers in the end weren’t that massively different.

Q4147 Mr McFadden: But do you see my point? I’m not that bothered about whether the fine is going to the US regulator or the UK regulator. This is a fine arising as a result of wrongdoing from within a particular part of the bank. Why should the same logic not be applied to a fine going to the UK regulators as is applied in relation to the US regulators, given the source of the problem?

Sir Philip Hampton: I think his argument was really about protecting the interests of the taxpayer, recognising there is some internal circulation of the payment of the fine to the FSA.

Q4148 Mr McFadden: Leave aside the Chancellor here. Do you see the point I am making?

Sir Philip Hampton: Yes, but our judgment was-we came at it from a different point. Obviously, the Chancellor, quite rightly, has the sense of national accounts foremost in his mind. We don’t: we have the management of the business foremost in our mind, and we certainly thought it was appropriate to make significant clawback in relation to the fine. It’s an important thing to do financially: we’ve got a big extra cost; we have to find some offset. We also think there is a lesson that our people and the company as a whole need to learn about it. £300 million as a clawback is very penal. We think it’s right that it should be very penal, and we think it’s enough.

Q4149 Mr McFadden: I’m not sure the taxpayer will share the same judgment.

Let me go back to the issue of LIBOR. We have now questioned a few banks about this, and there is a certain familiarity about the answers that we get. One of the answers is always that people in senior positions, like yourself and Mr Hester-they always say that they found out about this very late. You said, Mr Hester, that when the CFTC came knocking on the bank’s door was really when senior management found out about it. But others in the financial services world were writing and speaking about LIBOR for two years before this. The Wall Street Journal was writing about this in 2008. Bloomberg was writing about it. There was a long process involving the Bank of England and the BBA, of which RBS is a member, asking questions about LIBOR. Even if you did not know about concerns within RBS itself, were either of you aware of those articles or that BBA process?

Sir Philip Hampton: Personally, I think there’s a lot of hindsight in this. You’re right, and the FSA report identified the Wall Street Journal article of 2008, but I don’t think it was front of mind for many people in financial circles. One article in one newspaper, without much follow-up, is easy to identify in retrospect, but this wasn’t a prominent issue. LIBOR as a whole was not a prominent issue. LIBOR has been going since the mid-1980s and has been a really unremarkable benchmark, basically. The relationship between LIBOR and gilts or LIBOR and US treasuries and dollars wasn’t much disturbed for decades. So this was a relatively-

Q4150 Mr McFadden: What about the BBA process? There was the process involving the BBA and the Bank of England looking into this. So it’s more than one newspaper article, isn’t it?

Sir Philip Hampton: Yes, but if you think of it in the context of the financial crisis as a whole, I would not say the LIBOR issue was prominent. Clearly, with hindsight, it should have been more prominent, because all of this wrongdoing was taking place. That’s scandalous, and we fully accept that we were slow to get on to the case, but I think it’s understandable we were slow to get on to the case-a, because it wasn’t prominent in many people’s minds and certainly not the banks as a whole, and b, we were dealing with a hell of a mess at RBS in particular.

Q4151 Mr McFadden: Mr Hester, one of the things that was cited in the regulator’s report was that within RBS there was a practice of submitters and traders sitting together. That obviously should not have been happening, should it?

Stephen Hester: That was a practice that was before I arrived. I think the main practice ended in 2008, before I arrived, and there was a little bit that went on in 2009, so I was unaware of it. The motivation, as I understand it-this is, obviously, only listening to other people-highlights exactly one of the issues around LIBOR. The motivation for it was for there to be more market colour available so that, among other things, LIBOR could be better set or other people could be better set. There was not a realisation that LIBOR could be fiddled. That realisation, obviously, is now uppermost in our minds, and with that realisation it was clearly not a sensible thing to do.

Q4152 Mr McFadden: The FSA final notice says, "RBS failed to identify and mitigate the risk that Primary Submitters would take into account the effect of LIBOR or RBS’s LIBOR submissions on their trading positions as a factor in determining RBS’s LIBOR submissions until March 2012". That is long after you got there.

Stephen Hester: This is now a subsequent point; this is not about the collocation of derivatives and cash traders. The BBA had a requirement-I think it may still have a requirement-that LIBOR be set by people in charge of the cash books, which means the money markets traders. Therefore, it was genuinely thought that those two roles should be collocated, and I think there may be some banks that have not split the function even today. We split it in March 2012. The company thought that it was abiding by BBA guidelines. Obviously, the FSA has found that that is not how they want it done, and indeed the company changed in March 2012.

Q4153 Mr McFadden: Would you agree, given that you are now bank No. 3 in this process of these regulators’ reports-there probably will be others to follow-that it is time to leave behind the rhetoric of describing this as being rogue traders? Would you agree that what we are looking at here is something that is much more systemic and much more widespread-a network between banks of systematically rigging a key interest rate? This is not rogue traders, is it? This is a deeper cultural problem in the setting of these rates.

Stephen Hester: Obviously, I do not know, and I do not think any of us knows, how many banks are involved-only the regulators know that-so how widespread it was, I do not know. What I would say is two different things. First, LIBOR itself was clearly widespread, as you say, well beyond a bank, and therefore it must be seen as an industry problem in addition to individual bank problems. Secondly, I completely agree that, although LIBOR is an unrepresentative extreme, it is too readily redolent of a selfish and self-serving culture in the banking industry as a whole, which has crossed lots of different kinds of banking and which needs to be addressed. It is being addressed, and of course that is exactly the reason for this Commission’s existence. I think that one has to draw this narrowly to institutions, broadly to the industry and still more broadly to the culture of banking.

Q4154 Mr McFadden: Given the failure of your internal mechanisms to discover this, and given the failure of your supervisory mechanisms to find out about it and send it up the chain, which is what should happen in these circumstances, do you think that RBS is just too big to manage?

Stephen Hester: I think that the RBS of 2008 and before was too big and complicated for its capacity to manage. I do not think it is impossible for there to be a big bank that can be well managed, just as I do not think it is impossible for there to be a small bank that can be badly managed. Clearly, in the case of RBS-exacerbated, no doubt, by the ABN AMRO acquisition-it was beyond that bank’s capabilities. We have tried to address that, and we are trying to address it, in two ways: first, by the most dramatic shrinkage of scale and scope of any bank ever in history, and, secondly, by, hopefully, a dramatic improvement in the quality of people, controls and culture against which the scale and scope is offset. As I mentioned earlier, that is an ongoing, incomplete process. We are trying to address it from both ends.

Q4155 Mr McFadden: A final question for you, Sir Philip. In an earlier answer, you said that LIBOR was not the only control failing in the market’s business. Can you tell us what the others were?

Sir Philip Hampton: I cannot in detail, but the market’s business has been going through absolutely phenomenal change in recent years. Literally hundreds of billions has come off the gross balance sheet of the market’s business. I think that that process has been conducted very effectively, in the sense that we have not had major market dislocations and, frankly, losses, which might arise from a programme of spectacular change. Nevertheless, in the process of substantial change, we have had some control issues, which need rectifying. Some of them we have identified ourselves and some of them have been identified by the FSA. At the moment we are going about a major process of market control remediation.

Q4156 Mr McFadden: Are you telling us that at least some of these failings are subject to regulatory investigation?

Sir Philip Hampton: There are not many aspects of the bank that are not subject to regulatory oversight or supervision or investigation.

Q4157 Mr McFadden: You know what I mean. I am asking about something more specific.

Sir Philip Hampton: There is a particular focus of the FSA at the moment on the control processes in our market’s business. I do not think we are alone on that in bank terms, because this is a part of the industry that is changing so dramatically and obviously needs extremely strong controls.

Q4158 Mr Love: Sir Philip, it is reported in the press that RBS has written to former directors of the bank asking them to return bonuses earned during LIBOR, PPI or other scandals. Is that correct?

Sir Philip Hampton: It is not. It is correct that we are considering doing that. Clearly, the amounts involved would be de minimis in the context of the group as a whole, but, nevertheless, it may be right to pursue or at least ask people. We have no contractual right there. We have no rights of clawback beyond three years and so on. It would, as it were, just be putting pressure on their good nature to return some previous awards that they had received. Most of our discussions so far have probably concluded that the amounts we might recover would be exceptionally small and that it might be regarded just as a publicity stunt. We have not, however, finished our discussions on that. We will do so in the next couple of weeks.

Q4159 Mr Love: This would presumably include Fred Goodwin, but I am trying to tease out of you what the pros and cons are. You are saying that it is the right thing to do, but that may be misinterpreted and may not raise any funds. Would that be correct?

Sir Philip Hampton: In terms of bang for buck, we do not think it would produce a very attractive return, as things sit. All of the people who have received these bonuses know what they have received and they know what they have left behind. In a sense, there is already pressure on their good will or good nature.

Q4160 Mr Love: Does the 21 wrongdoers identified in the FSA final notice adequately reflect the level of LIBOR manipulation in RBS? I will ask Mr Hester. Only 21 were found from the widespread trawl of all the information sources. Do you think that that is the extent of it, or did it go much deeper and wider in the organisation?

Stephen Hester: I have no basis of knowing beyond the millions of investigations and so on that have been looked at. Even within the 21, it is important to note that there are big gradations. There were three or four ringleaders, and it stretches out. There were two who were recent graduates and had been employed by us for a matter of months, which is why we did not fire absolutely everyone. There were a couple of cases where we felt that that was the wrong answer, but that was only a couple of cases.

I believe that we have found the wrongdoers on LIBOR. I also believe, however, given the broader cultural issues that we have been talking about across the industry, that it is quite possible that in other instances there have been people over past years at RBS or other banks who have behaved in ways that we would wish they had not and would today come down on like a tonne of bricks. It would be surprising if that were not the case. Indeed, at our bank and others this is not the only circumstance where we fired people, whether it was a branch manager with his hand in the till or a trader doing wrong. You will never prevent any level of wrongdoing in life, unfortunately, but you have to do all you can to isolate it, whether that is cultural, or by way of the controls and ethics of the business, or then by way of the examples you make when you discover something.

Q4161 Mr Love: Let me look at what happened to the 21. You mentioned that some were not sacked but were disciplined. It says in the report that they have been severely disciplined. Without going into the individual instances, can you give us some idea of what that entails? Is it docking them of bonuses?

Stephen Hester: The overwhelming majority have gone with all financial clawbacks exercised, where we had that option. The numbers of people who have not left our organisation that are on that list fall into two categories. There is a small number who are still undergoing the disciplinary process. The reason for that is that part of what the authorities have been doing is gathering information from different banks and putting it to banks who otherwise may not have been aware of their bit of it. So there are a couple of instances where information arose as recently as December which we did not have, and that means that there are still some people undergoing the disciplinary process which may end in them leaving. That is why it is ongoing.

As I say, there are a couple of cases where people who were given final written warnings and financial penalties were kept in employment. For the two I have in mind it was largely because they were young graduates whose involvement was very peripheral, and it was our judgment that they were in a sense-I won’t say innocent bystanders-but caught in something that they could not at that stage be held responsible for, beyond the action that we took.

Q4162 Mr Love: It was suggested that six have been dismissed and one was dismissed for another purpose. Six were severely disciplined. Eight left. Will all of those eight who have left, if they were due bonuses or deferred payments, have had that clawed back?

Stephen Hester: When you leave a bank, certainly to go to a competitor and I think that is what happened in these cases, you leave anything that is unvested, if you like, that is claw-backable, on the table. I have not personally audited every single one on that list, but that would be the situation when someone leaves us to go to another bank.

Q4163 Mr Love: The statement that you put out at the time said: "Supervisors with accountability for the business but no knowledge or involvement in the wrongdoing have received zero bonuses for 2012 and a range of claw-back from prior years depending on specific findings." Does that apply just to the immediate supervisors or will that apply throughout the management chain?

Stephen Hester: It applies all the way up and throughout. There was a thorough so-called accountability process to look at culpability and so on, and then the board had extensive broader dialogues about the captain-on-bridge type things and about the £300 million that Philip was talking about. The result of all of those was indeed the statements that you have referred to.

Q4164 Mr Love: We have had several discussions and I apologise for going over it once again, but can I come back to the case of Mr Nielsen? Did he at any stage during this process offer his resignation to the bank?

Stephen Hester: Forgive me, because I was in a different place, but I understand that he discussed that when he was here in the prior session.

Q4165 Mr Love: He was not asked that specific question. I ask that because in all the early press reports on the LIBOR issue, perhaps it was an assumption, but it was certainly stated that both Mr Hourican and Mr Nielsen would be leaving the organisation. That seemed to change at a later moment. I am trying to get at the sequence of events that led to that. Perhaps the press got it wrong; it would not be the first time. In the previous session, Mr Nielsen accepted responsibility for things that had happened.

Stephen Hester: Obviously, I may not have been in every discussion. I have no idea where these press articles, or indeed most press articles, come from. I would say that there is no one in any of the chain, including the people here and the board and so on down, where there has not been some aspect of consideration of culpability, and then of responsibility and accountability, and judgments made. That certainly was true in the case of Peter Nielsen, in addition to the others. As far as I am aware, at no point was there a plan for Peter to leave the organisation. As the chairman has said, the board alighted on, after discussion, John Hourican as the right accountability answer, as opposed to the culpability answers that we have been talking about with the ones specifically involved.

Q4166 Mr Love: That is where we find some difficulty. He seems to have been singled out as the only person not to fall on his sword within the investment bank operation. Mr Hourican answered the question on behalf of Mr Nielsen by saying that it was his view, in consultation, that it was necessary for Mr Nielsen to remain in post. We could argue about whether that is good for the bank or not. To what extent were you involved, Mr Hester, in those discussions about whether Mr Nielsen should remain in position?

Stephen Hester: I was certainly involved. Of course, there are different perspectives. I am sure the chairman will add anything that he would like to. I looked at it from a couple of different perspectives. First, who was culpable? Who did wrong? To my mind, if you do serious things wrong, it does not matter what your rank or station should be; the answer is then clear. Then I moved on to who reasonably should have known about those wrongdoers. I felt, although that was a second level of judgment, that the answer should be clear for them. Then you move on to people who were captains on the bridge at different levels of bridge. There I think you can no longer say that they were culpable, so you then have to say, "What are the interests of the institution as a whole?"

Then you are balancing, if you like, sending the sorts of signals about behaviour, responsibility and accountability with having people who can run this institution, serve customers and try and get the taxpayer their money back and so on. There was then an intense judgment about the broader interests of the institution, balancing the immense job that we had going forward with huge sums of money and numbers of customers whose interests we have to guard versus how many people should take the captain-on-the-bridge position. From my point of view, that was the balance. There is not a formulaic answer to that, but our judgment was that a greater loss of non-culpable people, non-responsible people, but people who are accountable, would have tipped on to harming the institution and the people who rely on it, which is all of us, more than the moral signal it sent. That is what we were trying to balance up.

Q4167 Lord Lawson of Blaby: Mr Hester, may I bring you back more closely to the issue that led to this Commission being set up? You said right at the beginning of this session that at the heart of this scandal was the failure of a banking culture. Those are your own words. In a nutshell, how would you characterise that cultural failure?

Stephen Hester: I think that in the collection of failings of the banking industry, which I have, in a sense, been living with these last four years-as we all have-and which I had to try to diagnose in coming into this job and trying, along with my colleagues, to put RBS right, there is something that you can join up. During the period of extraordinary boom of prior years, hubris set in to this industry, and that hubris showed itself in the physical dimensions of an industry that expanded too much, got too big and had huge risk concentrations that were not properly assessed, understood and controlled. The hubris had a further cultural dimension to it, which I have described-one can do so in many different ways-as an excessively selfish and self-centred culture.

Of course, we are trying to thread that across the many, many different dimensions in which the banking industry failed, and each one has its own narrow story, but that is a thread that you can thread across. We can of course say that, on one level, everyone in life is selfish and that all society is built on that, that commerce is built on that and so on and so forth, but what is clear is that the gradation or degree of self-servedness of the banking industry got to the wrong place. If there is something that you can thread lots of different things in, such as PPI in retail or whatever, that would be a way that I would describe it. Therefore, while the majority of the banking industry’s failings were not crookedness, one could argue that LIBOR is crookedness, but it was crookedness driven by excessive selfishness and therefore it is legitimate for us not just to say that narrow crookedness is all we need to fix, but rather to cast a broader net across the way that the banking industry operated in coming up with our answers.

Q4168 Lord Lawson of Blaby: Let us accept your characterisation of it as a culture of excessive selfishness. Did that permeate the entire group, or was it in some parts and not in others?

Stephen Hester: I think there are huge gradations. They vary by all sorts of different definitions. To take the extreme of wrongdoers, we can find them at some level or other in every geography where we have major employment and in every type of business. We can find people who excessively sold current accounts or credit cards the same as we can find people who created excesses. We would be letting ourselves off in trying to change the industry lightly if we allowed too narrow a focus.

All of that said, it is clear that the amounts of money that individuals were playing with, and therefore the temptation, is greater on a trading floor than it would be if you were selling credit cards to customers in a branch. That does not let us off the responsibility of getting the credit cards right, as we would get a trading floor right.

Q4169 Lord Lawson of Blaby: No, of course, you are responsible for getting everything right. That goes without saying.

When he was here, Mr Cameron pointed to the difference between traders, who he said had a culture more like other traders in other banks, and those who were not traders. Do you think that, in a sense, this is overwhelmingly, although not exclusively, a problem of a trading culture that went wrong, rather than a banking culture?

Stephen Hester: I think that the narrow thing was a trading culture. I am not for a moment suggesting that they were involved, but you would not think of Lloyds bank as a trading bank, and they set LIBOR and I think Santander does, so it is impossible to be a bank serving corporates without having some markets activities. I do not think that this was an issue of big investment banks, although it was an issue of trading. The issue of banking culture should be more broadly drawn still.

Q4170 Lord Lawson of Blaby: If we are trying to solve this problem, do you think that some degree of structural change might assist?

Stephen Hester: In short, no. I am not saying that there is not an argument for structural change, but when you look at wrongdoing and cultural failings, they occur big/little, complicated/simple, and so on and so forth.

Q4171 Lord Lawson of Blaby: You draw no distinction between the culture of proprietary trading, where by definition there is no customer at all, and a culture of serving a customer?

Stephen Hester: No, I draw a massive distinction. At RBS, one of the very first things I did-in fact, I think it was literally the first statement I ever made as incoming chief executive-was about refocusing the company around customer-driven activity. When we have described the massive shrinkage of RBS and its ambitions, one of the guiding philosophies behind that-there were obviously some financial issues about stability-was my belief, in which I am not in any way unique, that banks are there to serve customers, and that what you do must keep that at the centre. I have not made one single statement to shareholders, who may be thought to be interested in profits, without saying that customers come first.

Again, I link the failings of the banking industry, which is a broad palette, with the need to put customer service first and understand that the health of the organisation comes from doing that well. That is where we need to bring the banking industry closer to. In so doing, I am not trying to malign probably millions of bankers who all day every day serve customers honestly and to the best of their ability, but sadly that proportion, however high it is, is not yet high enough.

Q4172 Lord Lawson of Blaby: Going back to the LIBOR traders, even if they had not strayed into wrongdoing, which they did on a large scale, they were in fact not serving customers at all, were they? They had no customers to serve.

Stephen Hester: I mentioned that I think that if you are serving customers, if you are serving corporates, you have to be in the markets business. I wasn’t at a bank before RBS, but before that I was at Abbey National and there was a markets business. I think that society needs things such as foreign exchange and LIBOR off which to price things. So you need to have functions that make markets, even though those markets are then the thing off which other bits in the bank rely, in the same way that you need technologists to make computers run even though they are not dealing directly with customers. However, I think that you need to try to ensure that the ethos of the bank-whether it is the technologist with his computer or the LIBOR market maker-is such that everyone understands that, even it is indirect, their job is to have an institution that serves customers well. The banking industry got in the wrong place in the run-up to the crisis. We are trying to put that back together. It is a big task and we are part-way through.

Q4173 Lord Lawson of Blaby: But these people were not market making. What they were doing was a hedge fund operation, wasn’t it?

Stephen Hester: I think that the LIBOR setters are a form of market maker, if I could put it like that. The process of setting LIBOR is supposed to be-

Lord Lawson of Blaby: I am not talking about the setters, I am talking about the people sitting next to them, the traders.

Stephen Hester: And the derivatives traders were making markets in derivates from which, again, there is end customer usage. What you are right about is that making markets-actually, almost everything in banking-has a principle element; if I extend a mortgage to someone, I am taking proprietary risk, even though it is a customer transaction. In RBS, we tried to eliminate the bits of the previously sprawling organisation that were truly distant from customer rationale. In that sense, if the Volcker rule was capable of easy definition, I would absolutely think that it is a terrific rule for a banking industry that I believe should be centred around customers.

Q4174 Lord Lawson of Blaby: So you are in favour of it if a satisfactory definition can be found.

Stephen Hester: Conceptually. And in any event, whether it is found or not, conceptually we tried to remake RBS not so that every activity has no element of proprietary-I think that that is impossible-but so that the guiding rationale and dominant principle is serving customers.

Q4175 Chair: While we are on this point, do you think that the definition of a Volcker rule has been found, or it is going to be found?

Stephen Hester: I may be slightly behind the times, but I think that, in the United States, they are finding it very challenging.

Lord Lawson of Blaby: They are a very litigious society. We operate in a slightly different way.

Stephen Hester: I am not saying that I want to hide behind regulation. I, along with my colleagues, want RBS to exist to intermediate customer needs. That requires us, as a bank, accepting risk in the middle, and there are indirect kinds of risks as well as direct, but our guiding rationale must be about serving customers well, and then the manner in which we do it, in addition to just the outcome.

Q4176 Lord Lawson of Blaby: One last question about RBS: you have what is in a sense the biggest part of the RBS group, one of the largest-if not the largest-commercial banking operations in this country. That is of vital importance to business and industry and particularly important to small businesses. Getting that right and healthy is probably the most important single thing that could be done. Do you think that that business could exist in a healthy and useful way on its own? That does not mean to say that you do not provide other services to customers, but you might provide them on an agency basis, for example.

Stephen Hester: There is no example of which I am aware of a bank with a leading position with corporates that does not supply, as principle, from within the group-not necessarily the same legal entity-markets activities. The view I took in the case of RBS when we were recasting the strategy was that, in order to fulfil our corporate mission, we had to have some markets activity to be credible in the things which corporates used, but they did not have to be anywhere close to the scale on which they were being undertaken. That is why we shrunk the investment banking activities more dramatically than any other bank in the world and exited huge swathes of them, but I do think that we would not have the role we have in serving corporates in this country if the answer was zero in the group. By the way, I do not think that ring-fencing is an obstacle; in other words, you can have ring-fencing and still provide within the group these services, so my argument is not against ring-fencing, but I do not see any other examples of leading corporate banks that do not have market activities in their group at all.

Q4177 Lord Lawson of Blaby: But many of them have much smaller market activities than you have, even in your reduced state now, don’t they? If you look, for example, at Santander, it is a much smaller section there.

Stephen Hester: And so, as I say, certainly our view was to shrink dramatically the markets activities, and there is still more shrinkage under way, but if you look at the structure of banks that serve UK corporates, there are three leaders at the moment: us, Barclays and HSBC. Then there is a big gap, then Lloyds, and then another big gap to other people like Santander and so on. Of course, each customer is nuanced and different, but you would see the same sort of thing in other markets where big companies are there in terms of the needs that they want.

Q4178 Chair: But you remain a well-known sceptic about all these structural changes, don’t you Mr Hester? You gave evidence to the Treasury Committee a long time ago and you have not changed your view that ring-fencing-

Stephen Hester: I have lived with the need for banking to change structurally and I have lived with the need to change dramatically one of the biggest institutions in the world-

Q4179 Chair: I know. I am talking about the specific, systemically-triggered structural changes.

Stephen Hester: My views on that, as you say-

Chair: Are well known, yes.

Q4180 Lord McFall of Alcluith: I would like to continue the theme of culture and ethics. Lord Lawson has spoken of culture being behaviour and ethics being how you resolve conflicts of interest. Have any concerns been passed from your legal and compliance teams directly to the board that you have then acted on? In other words, do legal and compliance have an independent life and have you ever noted or recorded them going independently to the FSA or to the police regarding any misdemeanours?

Sir Philip Hampton: I cannot recall an incident of going to the police, but I would be surprised if it had not happened. As a matter of course, we have significant engagement with the police. As far as the FSA is concerned, and the same will be true for every regulator now, we are completely open book.

Q4181 Lord McFall of Alcluith: I understand that.

Sir Philip Hampton: And it works both ways. If we find something wrong we tell the regulators very quickly, and if the regulators find something wrong they are straight on to us.

Q4182 Lord McFall of Alcluith: I asked the regulator this very question, and they have never had any recorded reporting to them by legal or compliance individuals separately. That would seem to indicate that they do not have a life of their own and the culture that exists in the banks is a culture of subservience by legal and compliance, rather than independence. That is the point I am trying to get at.

Sir Philip Hampton: I don’t see that. Obviously I can only speak for RBS in this context, but certainly our chief legal officer, our chief compliance officer and our chief risk officer are extremely professional.

Q4183 Lord McFall of Alcluith: Maybe you’d write to us. If there have been any independent referrals by them, would you let the Parliamentary Commission know? That would satisfy my question. Mr Hester, you have said in a number of interviews that a whole series of areas were "not up to snuff"-whatever snuff is, other than what you take through your nose.

Stephen Hester: I don’t.

Q4184 Lord McFall of Alcluith: Well, okay. You also say that there was a mateyness-a City bars kind of thing going back to the big bang, which was probably more at a junior level. That reminded me of my time in education where, if there was a mateyness by a group of exuberant young people, there was a pastoral lock on that and a monitoring of behaviour. It seems, in banking, that there has never been any monitoring of behaviour, and supervisory control and enforcement were virtually non-existent. The reason why we had that monitoring in education was so that we were on the front foot, and if anything happened, it could be avoided. There seems to be a reactive culture in banking, not an active, forward culture.

Stephen Hester: I think that you are absolutely right. One of the responsibilities of people in a position of responsibility, high or low, is to guide, educate and develop the people who work for them. The best people do it well, and other people do not do it well or at all. I believe that throughout this period many tens of thousands of bankers with supervisory responsibilities did that diligently. That said, we cannot but conclude, when we stand back and look at the whole picture of where banking got to in however many years you want to put before the crisis, that the supervisory standards ended up not being strong enough. Banking, regulators and society all had different parts where they got it wrong, and so we have to go back and try to learn all those lessons.

John Hourican, for example, talked about the process of graduate recruitment. It may seem strange to you that RBS wins awards for anything, but actually we win awards for recruiting from universities here in the UK among employers. We take that seriously. I spend significant periods of time-not as a per cent of my total-personally trying to set the tone and intervene at those sorts of levels. I completely accept your point, and I also accept that the banking industry has not done it as well as it should.

Q4185 Lord McFall of Alcluith: Sir Philip, given your background as former chairman of Sainsbury’s, would you as chief executive or chairman of that company be on the front foot if, for example, on Victoria street your assistants were throwing bananas at the customers rather than taking packaging from them and getting them out the door nicely? You would probably hear about that, wouldn’t you, and then do something about it?

Sir Philip Hampton: Yes. I am sure that we have not got time to compare industries to any great extent, but they are chalk and cheese. The banking industry-Stephen has talked a lot about its attitude to customers-is very deficient, and it has been deficient over a long period of time.

Q4186 Lord McFall of Alcluith: You say that Stephen’s first comment was about having to be more customer-orientated. There is a commonality between banking and retail in that regard.

Sir Philip Hampton: Yes, but the banking industry does not have anything like, to my certain knowledge, the customer focus that the supermarkets business does. It does not really matter which supermarket group: they all know, every day, that they have got to get customers through the door or they are dead. I do not think that you get the same focus in the banking industry. You certainly do not-

Q4187 Chair: In other words, there is not the competition. You are agreeing with that.

Sir Philip Hampton: I am not saying that this is a cosy little cartel. People will not change their bank accounts, realistically, every day; they may shop at a different supermarket every day. There are clear business model reasons why this is the case, but the point I am making is that banks have a lot to learn from some other businesses.

Stephen Hester: May I add to that point? One of the important differences in banking, which is why trust is so important, is that in the case of a supermarket, you probably consume within a day whatever it is you buy, and it has or does not have effects in terms of nutrition and so on; for banking relationships, they can last for decades, and there is often a level of complexity and understanding that is different. So we require from the banking industry some different things than we require from an industry whose customer life cycle, if you like, can be measured in days, hours or whatever, in terms of their consumption.

Q4188 Lord McFall of Alcluith: What you are saying to me is that there should be a heightened duty of care with bankers, because when people are buying a product, they do not know if they have a gold mine or-

Stephen Hester: They are stuck with it for longer.

Q4189 Lord McFall of Alcluith: Exactly. Therefore that duty of care is important.

I have been taken by a number of the comments that David Kynaston, the City historian, has made. Largely, he has said that the City-and financial services-is an island apart from the rest of society, particularly in the area of rewards and remuneration. What are you doing to close that financial and social breach that exists at the moment?

I will give you a few examples, and see what you think. For example, if you are going to be transparent, why do you not publish the top dozen or so executive pay packages outwith the boardroom and go even further than that? Why do you not establish an internal body to show the rest of the market that you are taking high pay seriously, so that you monitor that? Why do you not put outside representatives-employees or whatever-on the closed shops of remuneration committees? Lastly, why do you not follow the example of some other banks that ensure you pay a living wage to your employees, rather than just a minimum wage?

Sir Philip Hampton: Pay is one of our costs-it is actually our single biggest cost-so simply from the business point of view, we would like to keep our pay as tightly under control as possible. Why would a board of directors want to do anything else?

It is a matter of record that RBS’s pay, particularly in the most sensitive areas-the markets business, investment banking and so on-has been a backmarker. We think that is the right positioning, and we think that that is the right positioning from a business point of view. We have been shrinking our markets business, and therefore we are able to take more risks in losing people, so we are not paying up as much for retention as maybe some other banks. We think that is the right business strategy.

Our pay is at the lower end of the spectrum, however you want to measure it. We have a very large markets business, which we think is important, as Stephen has described, for our corporate franchise and for other fundamental franchises. We do need to recognise markets. We cannot live completely outside the markets; at least, we have not been able to identify a way that we can sensibly run the business completely without any regard for market norms.

My own view is that pay will continue to fall in the City of London for a while. It needs to do that so that an appropriate return can be made on the costs of capital.

Q4190 Lord McFall of Alcluith: But I asked you specific things. I do not want to waste any time in the Committee, but I would like you to take back the suggestions that I have put to you and to write back to the Commission on those proposals.

Lastly, may I look at the issue of your response to the Commission’s panel on mis-selling and cross-selling? You state that the FSA did not use "formal means" to prosecute further change. Why did you need the FSA to instigate formal means for a scandal that has been going on for 15 years or so? If you are alive to the concerns of society, you would have known these problems since 1995. Part of that, for a few years, was on your watch, Mr Hester. Why were you not alert to that? How many people have you fired for PPI mis-selling?

Stephen Hester: In respect of PPI, I remember-this was roughly at the time I arrived at the end of 2008-Gordon Pell, who I believe has appeared in front of you, coming to me and saying that we are going to stop PPI selling, or single premium PPI selling. The closest I came to it was to concur. In that sense, there was no decision for me to make. Obviously, what has subsequently happened is not only stopping, but going back and restituting, and that needed an industry-wide process.

Q4191 Lord McFall of Alcluith: Yes, but I think that you are going away from the main question here. This was a product that was not serving the interests of society generally. It had been flagged up for so many years. If you are going to have an appropriate culture and ethics in the organisation, the decision should be taken within the organisation and not wait for some laggard regulator to come along and ensure that that is the case. That is the point I am making to you. Again, if you have fired anyone for PPI mis-selling, I would be happy to hear about that in your written submission.

Q4192 Lord Turnbull: May I come to the future of RBS? The Government have said that they want to return it to the private sector. I think that many people assume that that means that when a certain degree of remediation is reached, a tranche of shares will be sold, then another tranche and another tranche. Eventually, you get back to a privately owned RBS, which is pretty much where you have it now except perhaps minus the 316 branches. Others say that as there are various problems with UK banking, including lax competitiveness and variety, are there other structural options that should be considered now? Do you have a view on whether a full range of other options, selling bits in parts, could or should be looked at? Or do you subscribe to the progressive return of an RBS that is recognisable from what it is now?

Stephen Hester: Obviously, in a sense, it is entirely down to the Government as to what they do with their shares and how they undertake their influence and as to what they do in policy terms vis-à-vis the banking industry or anyone else. I guess our brief has been customers’ risk and shareholders-that is, taxpayers. Every time we have looked at alternative structural solutions, they have been worse on one or more of those dimensions. Although we are not ultimately the people who must judge the public policy issues, they have been materially worse.

I hope the process that we have undertaken of very radical reform is close to practical completion. In other words, as we move into 2014 and soon thereafter, I hope that this company’s restructuring period is, if not fully behind it, largely behind it, and that we are able to start thinking about dividends again and indeed that the privatisation can happen thereafter. Again, it is up to the Government what they do with their shares. Our branch example, sadly, and it may well be true of Lloyds and Co-op soon, has demonstrated the enormous costs of separating sub-bits and the lack of buyer interest in doing them. Whether there is a public policy override is obviously not for us but when we have been asked to look at customer and shareholder risk, we come up, every time, with the route that we are on, painful as it might be, as being the best of the available routes.

Q4193 Lord Turnbull: But do you think the Government should be adopting the approach of maximising the proceeds that they get? This was a dilemma in the original privatisation programme. They could sell things as they were or they could sell things in ways that improved the structure of the economy-

Stephen Hester: Obviously, I am not a Government spokesman, but I think that the Government has been very prominent among world Governments in taking measures that were not narrowly in its shareholder interests, as a shareholder of Lloyds and RBS. All of the banking and regulatory reform in the UK, and all of the capital and liquidity standards, which, by and large, are at the more far-reaching end of global, work, in the narrow, against immediate shareholder value in banks. In the broad, the Government has taken the view that they are right for the economy and, indeed, probably in the long-term interests of a healthy financial services industry. I would certainly not see the Government as having taken a short-term and easy way out in favour of a high share price.

Q4194 Lord Turnbull: There is a UK commercial bank, but that is about a quarter of the total. You also have an investment bank, a Citizens bank in the US and a whole collection of bad bank assets. You can see there are different possibilities. Have you looked at hiving off the bad bank assets, trying to release the bank from that legacy and letting someone else deal with the problem?

Stephen Hester: The UK bits of RBS, depending on your measure, are around 70% of the total. Obviously, that is rising, as by far the biggest shrinkage has come from non-UK bits. Retail and commercial banking is getting on for 80% of the total, having been as low as 40% when we took it on. We have worked at every possible angle that would be consistent with the triangle of customer risk and taxpayer, or shareholder, interest. The bank’s assets are £750 billion smaller, which is something like five times the entire size of the Nationwide building society. We have done that through the route that we felt took the least risk with the financial stability of RBS and those who relied on it, including the Government, and with the Government’s interests. The Government, or public authorities, had £500 billion of assets that they were on the hook of and that they are not now-£300 billion of asset protection scheme and £200 billion of special liquidity measures. There remains the £45 billion of taxpayer equity injection, which, in a sense, is last in the queue, by which I mean that customers and risk came first. We hope, by what we are doing, that shareholders, of whom the taxpayer is the greatest, will be the beneficiaries of RBS returning to normality, which I hope is not too far away.

Q4195 Lord Turnbull: Is retention of Citizens a vital part of this?

Stephen Hester: I think there is no part of RBS that we should be religious about in terms of its ownership. We are stewards of the interests of the parties that we have been talking about, and I think are duty-bound to assess any and all outcomes for every piece of the bank. As I say, there is no bank in the world that has shed as much as us. Maybe some people would think it is too much, maybe some people would think it is not enough; it is an ongoing process. But we must always be clear that we are custodians of this bank for its stakeholders, of whom customers, in my book, come first, and then society and shareholders are inextricably bound in what I described as a triangle.

Q4196 Lord Turnbull: I have one last question on a completely different subject, but it follows something we dealt with earlier. Most clawback operates where there is some value you have indicated you are going to hand over, but where you find a reason not to do so and you do not pay. Beyond that, is it possible to tell people, "Here are some fully vested shares. You’ve got to hold them not only as long as you stay in the company, but for a period after you have left it"? Is that an enforceable proposition? Can you say, "For two years after you’ve left, some of the shares are clawable-back"?

Sir Philip Hampton: I would think that is possible, technically, but it is not something we have looked at.

Q4197 Lord Turnbull: No, but at the moment we have what you described as malice, where you are not completing a transaction, yet you are not fully vested. Some people would think that that doesn’t leave enough scope, enough clawable-back value. This is the point you have reached yourselves. Because you have not arranged a contractual holding, your chances of getting money back on a voluntary basis are pretty slim.

Sir Philip Hampton: There is a discussion taking place, not just in banks but in public companies generally about what is the right deferral period. It is most commonly three years, but a lot of people say it should be longer. We will have a look at the specific issue of what happens after people have left the company and come back to you.

Q4198 Mark Garnier: Sir Philip, I finally return to the questions about the bonus clawback in terms of paying this fine. You answered some questions from the Chairman a little earlier about the bonus pool which has yet to be decided by RBS, yet out of this hypothetical bonus pool you will pay some of this fine. How do we know that you are not just going to increase the bonus pool sufficiently to be able then to reduce it by the fine, getting around the vexing problem that way?

Sir Philip Hampton: As we said earlier, we have to be very clear and public-to this Commission and elsewhere-that we have exercised clawback properly.

Q4199 Mark Garnier: Is it clear when something doesn’t exist yet-this year’s bonus pool?

Sir Philip Hampton: We will have to support the argument that we have committed to clawing back the US elements of this fine.

Q4200 Mark Garnier: How much of this will be clawed back from previous years’ bonuses that have yet to be paid?

Sir Philip Hampton: I can’t give you the precise figures.

Q4201 Mark Garnier: Can you answer another question? How much previous years’ bonuses have not been paid that are available to be clawed back?

Sir Philip Hampton: I’m not sure I can give you that figure.

Q4202 Mark Garnier: You must have it somewhere.

Sir Philip Hampton: Yes, we will have it. We can let you know.

Q4203 Mark Garnier: Ball-park?

Sir Philip Hampton: Let’s say a half, broadly.

Q4204 Mark Garnier: So you say half the bonuses that have been previously paid have been held on to?

Sir Philip Hampton: Yes.

Q4205 Mark Garnier: So, what was last year’s bonus pool?

Sir Philip Hampton: £785 million is the correct number in last year’s board accounts.

Q4206 Mark Garnier: So there is probably £350 million sitting in people’s bonus accounts.

Sir Philip Hampton: Yes. I would not want to confirm that, but indicatively it would be something like that.

Q4207 Mark Garnier: So, you actually could pay the whole of this fine out of the bit of last year’s bonus pool that has yet to be paid? That would be quite a good idea, wouldn’t it?

Sir Philip Hampton: It might be a good idea at the highest level. What we want to do is spread the clawback pain reasonably widely, as I said. We will also make sure that it is focused on the people who are most directly linked to where the wrongdoing took place. So bonus clawback will be very much focused in the markets business.

Q4208 Mark Garnier: One of the things that struck me about this Commission is that when we have seen people from banks-and I have no doubt of the sincerity of this-there has been a commitment that good practice should be driven by culture from the top. You would agree with that. Yet how do you demonstrate to people that you are particularly unhappy with the culture from the top? Is it not a good way, to turn round and say, "Actually, we’re going to claw back your bonus because we have got a big fine?"

Sir Philip Hampton: Yes, I think we were the first bank to introduce the process of deferral and clawback. We didn’t do it just because we were under pressure, we did it because we thought it was an important part of control and culture, effectively. We weren’t using the word "culture" so widely at that time, but that was what it was all about, and it was not just in relation to public scrutiny. We have applied clawback pretty widely. We did so last year on a variety of issues, so we are using it as a tool to drive change in the business.

Q4209 Mark Garnier: How much did you claw back?

Sir Philip Hampton: I cannot remember. We can let you know. We have sheets of people going to the remuneration committee for whom we are applying clawback.

Q4210 Mark Garnier: Would you also not agree that if an honest person quietly sitting at a desk sees wrongdoing going on next to them, there would be far more incentive for that person to become a whistleblower, or even cast a judgment on their colleague if they were doing something wrong, knowing that they would be personally liable for it if a fine was subsequently imposed?

Sir Philip Hampton: I think that’s right and one of the messages that will emerge from this exercise-absolutely.

Q4211 Mark Garnier: Stephen Hester, when did you first hear about the LIBOR investigations?

Stephen Hester: As I said before, from the existence of the CFTC-driven review in the weeks thereafter, in 2012, and the existence or the discovery of the wrongdoers in the spring of 2011.

Q4212 Mark Garnier: And then the FSA investigation?

Stephen Hester: The FSA was kept fully informed all the way along, first of the CFTC and thereafter. That was a parallel and then, obviously, the FSA effectively stepped to the forefront once the wrongdoing was uncovered.

Q4213 Mark Garnier: Did either of you have any conversations with the FSA or the CFTC?

Stephen Hester: Personally, I did not speak to the CFTC. We have had extensive conversations with the FSA.

Q4214 Mark Garnier: You personally?

Stephen Hester: Yes, personally.

Q4215 Mark Garnier: About this specific point and your involvement in terms of being the CEO of the bank.

Stephen Hester: In lots of terms, but yes.

Q4216 Mark Garnier: It’s an important point, because what is interesting is that we have had a number of people who have come before us in a similar sort of position and actually senior managers of these organisations, in fact some of the witnesses before hand, have not had any interviews with the FSA and Tracey McDermott told us, when she was talking to UBS, that if the trail goes quiet or goes cold, she will not follow it up. So there were senior people at, for example, UBS who knew nothing about what was going on in the organisation they were running until such time as they read about it in the FT. Admittedly, those people have moved on, but what I am trying to get clear from you is what executive level conversations you had with the FSA? What I want to see is that the regulator is doing a proper job of holding people like yourselves to account.

Sir Philip Hampton: The board first heard about the LIBOR investigations in December 2010. Thereafter it was reported as a regular item at board meetings. So there was extensive board engagement. We did not actually realise-

Q4217 Mark Garnier: This is slightly different from what I am trying to get at. What I am trying to get at is at what point did you have any serious contact-you directly with the regulator?

Sir Philip Hampton: The regulator does write to me as chairman of the board from time to time on issues that they regard as extremely serious and they want to bring the matter straight into the board room. They did not do that in the case of LIBOR at any stage. I think it was a reasonable decision at the time.

Q4218 Mark Garnier: So the regulator did not write to you about LIBOR?

Sir Philip Hampton: No.

Q4219 Mark Garnier: Are you not surprised about that?

Sir Philip Hampton: Not at the time that LIBOR started to surface as an issue because we had not been involved in any suppression, which was the initial source of the investigation, and until April or May 2011, we had not identified that we had any wrongdoing. At the time that they were communicating with the management, the group treasurer and so on, it was not regarded as an issue that should belong at board level. I think that was a perfectly reasonable judgment of the FSA.

Q4220 Mark Garnier: But even at the most fundamental level, as managers of this organisation, would you not want to know if there was a potential flaw in the way in which the structure was being administered in terms of having the possibility of something going wrong?

Stephen Hester: Most definitely.

Q4221 Mark Garnier: So the regulator did not tell you?

Stephen Hester: No, I think there is intensive dialogue at all levels of RBS, board and management control functions and the front line, constantly with regulators, of whom the FSA is the greatest. On the specifics of LIBOR, I would say there was probably, let’s call it a dual track, for want of a better word. The actual investigation was undertaken in an independent manner by the enforcement division of the FSA and their lawyers and supervised by our lawyers internally and externally as befits something where conceptually the trail could have led anywhere. I think that is how it should be.

In parallel to the specifics of the enforcement, which were being constantly reported to us and to the rest of the FSA by our respective teams, is the constant dialogue of which LIBOR was a permanent element between the FSA supervisory teams and different parts of RBS, whether that be non-executives in their so-called close and continuous role or the executive line. There would be that division, so there would have been no moment at which there was a deficiency of dialogue, but there would have been this separate dialogue between the enforcement teams who conceptually could have been discovering things about either of us-not, as it turned out-and the supervisory teams.

Q4222 Mark Garnier: I am trying to get to the bottom of whether you are satisfied that the FSA-the regulator-is giving you enough help to ensure that you are compliant with the rules, in terms of what you should know as a management of the organisation?

Sir Philip Hampton: I do not think I have any specific criticisms of how the FSA behaved. Like everybody else, they came onto this relatively late, because it was not high on their risk agenda. It has moved up their risk agenda, clearly.

Q4223 Chair: Mind you, banks don’t need a forum to criticise the regulators, do they?

Sir Philip Hampton: At another stage I can identify one or two things where they might improve their game, but not in this area.

Q4224 Mark Garnier: One last question, for Stephen Hester. What measures do you have from your personal office to get a sense that the tone you are trying to drive from the top is actually being delivered on the front line? Do you have outliers who are friendly with your staff or with you who sit in the dealing rooms or in the branches in Kidderminster or Birmingham or somewhere?

Stephen Hester: As a matter of formality, I do not have a network of secret informers, as it were. As a matter of formality, I have the businesses that report to me, and I have the control functions. For these purposes, HR-for example-would be a control function in cultural terms. I then have endless informal networks, partly because I spend a lot of my time going around with our people and with customers, and getting informal feedback. Obviously, I get emails and other forms of communication coming in to my office, and then I have no shortage of solicited and unsolicited opinions. In the end, you have to rely-obviously-on the networks you have set out, and so on and so forth. No one individual should even try to be across it all, and still less is capable of doing so. One of the things, ironically perhaps, that I set out to do at RBS was to make it less chief executive-centric, and to have more of the burden of expertise, control and result shared on more shoulders than before. I felt-and still feel-that was an extremely important cultural change.

Chair: We have learnt a good deal this afternoon, although not quite enough about the bonus pool, but I am sure that will come. We learnt a good deal on a number of other fronts. Thank you very much for coming to give evidence this afternoon. If we need more, we will write to you.