Official Report (Hansard)
Date: 14 January 2009
COMMITTEE FOR FINANCE AND PERSONNEL
Role of Banks in the Current Economic Downturn
14 January 2009
Members present for all or part of the proceedings:
Mr Mitchel McLaughlin (Chairperson)
Mr Simon Hamilton (Deputy Chairperson)
Dr Stephen Farry
Mr Fra McCann
Ms Jennifer McCann
Mr Adrian McQuillan
Mr Declan O’Loan
Mr Ian Paisley Jnr
Ms Dawn Purvis
Mr Peter Weir
Mr Mike Bamber ) Ulster Bank
Mr Henry Elvin )
Mr Ben Christensen ) Northern Bank
Mr Michael Kidd ) Bank of Ireland
Mr Eric Leenders ) British Bankers’ Association
Mr Joseph McGowan ) First Trust Bank
The Chairperson (Mr McLaughlin):
I welcome the following witnesses to the meeting: Eric Leenders, the executive director of the British Bankers’ Association; Michael Kidd, the head of business at the Bank of Ireland; Joseph McGowan, the head of retail banking at First Trust Bank; Ben Christensen, the head of business development and deputy chief executive officer of the Northern Bank; Mike Bamber, the chief executive of retail markets at the Ulster Bank; and Henry Elvin, the head of business banking at the Ulster Bank.
Before we begin, gentlemen, I remind you and those who are in the public gallery that the evidence session is being recorded by Hansard. Therefore, it is essential that mobile phones be turned off completely — not left on silent mode — as they interfere with the electronic recording equipment. I suggest that Eric, on behalf of the group, make some opening comments. We will then open up the evidence session for discussion.
Mr Eric Leenders (British Bankers' Association):
Thank you, Chairman. Thank you for giving us the opportunity to speak to the Committee this morning. I will keep my opening comments brief so that we can get to the heart of the discussion and perhaps field the questions that I am sure that your Committee is keen to put to the four main banks that operate in Northern Ireland, which are represented here today.
We have brought along some specialists with us. They are in the public gallery, and it may be helpful if we defer to their expertise at times. They have been briefed to provide notes to those on the front row, if I may call it that, which may result in a delay in answering questions. That is not prevarication, merely the administrative process.
The overarching point is that the banks are keenly aware of the circumstances facing customers and small businesses in Northern Ireland as a consequence of the credit crunch and global recession. The banks are very keen to support, in any way, regional initiatives taken to help the community in Northern Ireland.
However, we must recognise that the present recession is a global recession, and, of course, it is those wider global pressures that have such a significant influence. It is within those constraints that the banks, which operate in the same markets and the same communities as those individuals and small businesses, are looking to find solutions.
It may be worth mentioning that we are very supportive of the initiatives announced this morning by the UK Department for Business, Enterprise and Regulatory Reform (BERR). We have only had a short time in which to consider the details of those initiatives, and, I suppose, the extent to which those opportunities can be adopted, exploited and maximised in Northern Ireland remains an open question. However, that is certainly something that the banks will be looking to do.
Do any of my colleagues want to add any opening remarks? It seems not.
In that case, I invite members to put questions to you. I will start with Ian Paisley Jnr.
Mr Paisley Jnr:
Thank you all for coming today. I will put my cards on the table and say that I am disappointed that it has taken from last October until now to get you to appear before the Committee. I know the reasons for that; however, there is work to be done in Northern Ireland, and politicians and the banks must work in partnership to try to provide solutions for the hard-pressed public — for your customers and for our constituents. I am glad that you are here at last, but it should not have taken so long to get you here.
There are a couple of issues that I want to put to you, but, first, I will set the scene. Usually, politicians are the butt of most people’s jokes; however, the current public perception is that the villains in the Senate Chamber are you gentlemen — the bankers — and that we politicians are the good guys.
We are the slightly less bad guys.
Mr Paisley Jnr:
The tables have turned; usually the public think that we are the villains. That is a perception that must be addressed. We must come out of this meeting working together to find solutions for the public. I understand that we are on the same page, so let us ensure that the public understand that we are on that same page.
My first question is limited to the two banks that operate in Northern Ireland that are UK-owned. To what extent are those banks influenced by UK reforms, and by the money that UK taxpayers have put into those banks in recent months through the British Government? Can you update us on the outcomes, if any, achieved as a result of your meetings with the First Minister, the deputy First Minister, the Minister of Finance and Finance and Personnel, and the Minister of Enterprise, Trade and Investment? Those meetings took place, I think, at the beginning of December. That is my starter for 10.
Mr Mike Bamber (Ulster Bank):
I shall take the first question, and I shall answer the second as best I can. Ulster Bank is owned by the Royal Bank of Scotland (RBS), which, in turn, has a 58% shareholding from UK financial investments. As such, we take our responsibilities very seriously. I do not believe that our responsibilities have changed in Northern Ireland. Ulster Bank has been in Northern Ireland for 170 years, and we intend to be here for the next 170 years.
Recently, we have launched initiatives, such as help for mortgages, which replicate initiatives that the Royal Bank of Scotland has announced in Britain — we are doing many of the same things.
Our face-off against UK financial investments is via our parent company, RBS. The messaging obviously comes through from parent to subsidiary, as one would expect. We take our responsibilities seriously. Today’s new announcements from Lord Mandelson include RBS-NatWest. We will seek to take our proportion of that investment from the business packages and translate those into clear business offerings to our business customers in Northern Ireland.
My chief executive, Cormac McCarthy, met the First Minister and the deputy First Minister. The message was very clear to me and my colleague Henry Elvin, who runs the business bank in Northern Ireland: we should carry on doing what we are doing, which is supporting Northern Ireland customers. They are your constituents and our customers, and we take our responsibilities very seriously. Although I have all-island responsibilities, I understand my responsibilities to those customers, as far as Northern Ireland is concerned.
Mr Paisley Jnr:
I hear that, and that is certainly talking the talk. However, what about walking the walk? One of my constituents could go to the Bank of Ireland, First Trust Bank, the Northern Bank or the Ulster Bank today and ask to take out a mortgage. If my constituent had done that in January 2006, he or she would have had to pay an arrangement fee of £599 in the Bank of Ireland; £499 in First Trust; £250 in the Northern Bank; and £395 in the Ulster Bank.
Today, the arrangement fee is, on average, £999 and the lowest is £800. I do not see you walking the walk when it comes to saying to your customers — who are my constituents — that if they borrow money, you will at least reduce fees and try to get them in the door by cutting out some of the additional costs that make it very difficult for those people as borrowers.
Yesterday in ‘The Financial Times’, I read that there is an allegation that all the banks — including the banks that are represented in the Senate Chamber — are using the rate cuts to widen their profit margins, rather than passing on the benefit of those rate cuts to their customers. Can you provide us with evidence that you will start to do that? That is what people need to hear from you today.
I am happy to answer that question. Ulster Bank has not increased its facility fees for at least the past six months. I will have to check my facts about fee increases previous to that.
Mr Paisley Jnr:
I can give you those. In January 2006, the Ulster Bank’s residential-mortgage arrangement fee was £395. In January 2007, it was £495 — an increase of £100. In January 2008, it was £1,495. Today, it stands at £999.
If those fees are for the same product, the price has come down from £1,495 since January 2008.
Mr Paisley Jnr:
It may have decreased by £496 in the past year, but it has still increased by £606 since January 2006.
I understand that, but the overall cost of borrowing covers a facility fee and an interest rate. You talked about price increases over three years, which is a pretty lengthy time. You ask whether we are walking the walk — we have passed on 3·25% of the overall 3·5% decrease in base rates.
The Northern Ireland banks account for only 20% of all mortgage lendings. I am very happy for Ulster Bank’s record on base-rate cuts to be compared with the former building societies, which account for 80% of mortgages. As far as the overall cost of borrowing, and the overall profit of borrowing, is concerned, we are walking the walk.
My banks’ margins have not widened in the past year. My net-interest margin, which is the most common measure, has decreased. We are in a confidentiality period before our results are posted at the end of February 2009, so I cannot say what that it is, but I promise that it has decreased, and our profits will have severely decreased when it comes to the reporting. That is because the cost of money has increased and our profits are decreasing. We are still giving good value to our customers, and I have evidence that shows that our customers believe that we are still giving them good value.
Mr Paisley Jnr:
I do not want to appear to be picking on you, but do you believe that the local banks have the available money and wherewithal to help business and borrowers, or are you are sitting on something that is much scarier for the public to understand? Are you capable of helping small businesses and your previously good customers who are now feeling the squeeze?
I will come in on that point, if I may. That is a question that has been put to UK banks generally. Those banks do not consider themselves capital-constrained in assembling small and medium-sized business (SME) portfolios. In other words, money is available to lend.
However, there is the additional impact of the withdrawal of other lenders from the marketplace. Significant refinancing is required over the next 12 to 24 months. That will amount to hundreds of millions of pounds that would have come from sources other than banks. Those sources are no longer there. Therefore, there is an issue of capital supply that is specific to small-business portfolios but does not necessarily relate to the banks. The question is where might that additional finance come from over the next year to two years.
Indeed, several banks, including the Ulster Bank, are committed to providing funding. Certainly, as part of any package with HM Government, there is a commitment to making funding available to 2007 levels. However, there is a question around the viability of the provision of that finance, because it is in nobody’s interest to provide finance to a non-viable proposition. Ultimately, that is simply debt.
Mr Paisley Jnr:
I believe in prudence. I would not ask anyone to lend money to a proposition that is not viable. I do not intend to be rude, but do not smack the Committee down in that manner. I would not ask the banks to lend to non-viable clients. I expect banks to manage their resources effectively and efficiently.
Over the past years, the banks have done very well by being part of the economy’s risk and growth sector. Where banks have risked capital, they have done very well and helped people grow their finances. Such customers, business clients in particular, have become very good customers.
They are now feeling the squeeze, and their banks are telling them they cannot lend them any more money, because they cannot risk any more. In fact, businesses are being told that they must make people redundant, even though they are good, solid businesses that need only the confidence of their customers in order to continue. The way in which they will gain that confidence is to continue to have a cash flow — working capital from the bank.
The Irish state underwrites your bank, Mr Bamber. Can you sustain the flow of working capital to those businesses?
We are still in a position to provide working capital, but money supply is definitely the challenge. The challenges have been around capital, and around overall funding.
I have not yet seen the flesh on the bones of Lord Mandelson’s announcement today. However, one of those announcements was about a working-capital-guarantee scheme, which is aimed at freeing up some of the banks’ requirements. Dichotomies that must be balanced include the state support for RBS. RBS has been lent part of it — £5 billion in preference shares — at a rate of 12%, which is a heck of a margin over the cost of the money that is being discussed by the Committee. In order for RBS to provide dividends to its shareholders, it is identifying how quickly it can return that £5 billion to the UK taxpayer.
Therefore, several things must be balanced. I will not kid anyone on the Committee into believing that it will be easy to balance all those differing priorities. At present, there is no restriction on Henry Elvin’s Ulster Bank business team or on my branches to lend money. There are targets, as there were last year and the year before, on personal loans, credit cards, mortgages, business lending and other services.
First, however, the risk profile has deteriorated because of economic conditions. Secondly, for our own requirements, that cost of funding is definitely out of sync with the base rate.
Mr Paisley Jnr:
I urge the banks to look at their fee structure in an effort to find a way in which to reduce some of the unnecessary costs. I understand that you must make a profit. I do not oppose the banking business’s making a profit — that is what you are there to do. Profit makes the world go around. However, examine your structure to see whether any ease might be granted that will encourage people to find the floor in the market and to start to invest and grow.
Mr Henry Elvin (Ulster Bank):
It is important to realise that level of approvals for loans to businesses in Ulster Bank — I am sure that it is the same in all the banks represented here — did not decline in 2008. Despite the anecdotal evidence, we are receiving fewer loan requests. Although we are receiving requests for working capital, loan requests have significantly reduced during the past quarter. However, approval levels have not reduced, and, moreover, the level of working capital for small businesses increased significantly during 2008. That is a function of the economy and the tightening of the market. However, loans were available, and, in the small-business sector, overdrafts increased by more than 20%.
Mr Paisley Jnr:
Are you renegotiating fees on overdrafts that were set during the past two years?
The Ulster Bank has agreed, along with the Royal Bank of Scotland, not to renegotiate on the margins unless there are extenuating circumstances on the risk side.
Mr Paisley Jnr:
I have heard businesses complaining that it is not viable to use their overdraft because of renegotiation of fees. That finger points at the Ulster Bank, too.
Our experience does not support that assertion. Overdraft utilisation increased by 20% in 2008.
Thank you for attending the Committee. It is important that elected representatives and the banks — a major player in the economy — engage in dialogue regularly. Indeed, I support your continuing discussions with the First Minister, the deputy First Minister and other Executive Ministers. I hope that we will continue to meet, because the economic outlook is gloomy.
Some reports have highlighted the dichotomy that, although banks and politicians want the economy to improve, the data that banks regularly produce indicate how bad the situation is and, in people’s minds, depresses the economy further. Banks are a key partner that will play a major role in improving the current predicament. You have a vested interest, because you will benefit significantly — as you have in the past — from a progression to better economic times.
Most businesses in Northern Ireland are small- to medium-sized. As Ian Paisley Jnr mentioned, organisations such as the Federation of Small Businesses (FSB) are telling us that higher charges are being imposed on overdrafts or are being withdrawn entirely. Although that is only anecdotal evidence, which might be impossible to prove factually, increased charges and huge interest rates are being slapped on to loans that have been granted to viable businesses that have been trading reasonably well during difficult times.
We are hearing such stories so frequently at a local level that they must have a factual basis. How do you justify withdrawing overdrafts, or increasing rates significantly on overdraft facilities, for viable businesses that have a good credit history? Why must some businesses accept higher rates when renegotiating loans? Why has there been a reduction in the availability of new credit generally? I know that times are difficult, and I know that you want to help those businesses out as much as we do. What is the reasoning behind those actions?
Mr Michael Kidd (Bank of Ireland):
I can speak only for the Bank of Ireland. I hear those anecdotes, but the picture is not a widespread one. In the past year, the Bank of Ireland has experienced lending growth well in excess of 10%. We launched a small-business product in April 2008, the price of which has not changed. There has been no widespread change in our pricing for business customers.
Certain property-related connections have been subject to price renegotiations — that is a factor of risk in that sector of the economy. However, in the Bank of Ireland’s experience, I do not necessarily recognise the picture that Mr Hamilton’s anecdotes paint.
I shall pick up on that point. Over the course of the past five or 10 years, margins and arrangement fees across the sector have been competed down. Banking for small businesses is a very competitive sector. The fact that my colleagues are seated around the table today is testament to the importance with which banks treat that sector of the banking market.
Margins and arrangement fees have been competed away; however, that situation is changing, and we are now witnessing pricing corrections that are more in proportion with the risk involved. There is now a widening of the margins for new deals to what might be a more realistic level outside the constraints of that competition.
It is also worth pointing out that a distinction must be made between the provision of finance for investment and finance for liquidity. The volumes of loan applications for investment have reduced significantly. That is a consequence of confidence. When I spoke to the FSB, a common theme that emerged was that many small businesses want to wait and see what happens over the next six to 12 months. They do not want to commit to a capital-expenditure programme that could prove difficult to sustain if the economy continues to deteriorate. There is a great deal of pent-up demand that should flow through eventually. We should collectively think about how to encourage businesses to consider investment plans, albeit that it is probably appropriate right now that liquidity and cash flow be their immediate priority.
I share Ian Paisley Jnr’s view. I want to see you guys make a profit; I want to see the money that the banks have taken from the public purse to be paid back as quickly as possible, and I want to see everything getting back on an even footing. That is a positive thing, but, on behalf of the constituents that we represent and the businesses that we want to see thriving in this economy, I appeal to you to re-examine the situations that I mentioned.
You said that there is no obvious evidence in your organisations of the problems that I mentioned, but we could not be hearing those anecdotes as often as we do without their having some basis in fact. I appeal to you to re-examine issues such as overdrafts and loan renegotiations. I have heard evidence of charges that were previously free to businesses being slapped on them, and that fees have been significantly increased. I ask you to examine that situation, with a view to assisting businesses, particularly small and medium-sized enterprises (SMEs) through this difficult time.
I heard you mention new small-business schemes. As these difficult times unfold, have any specific initiatives been introduced in the past year or so that are aimed at assisting SMEs?
I mentioned earlier a scheme that we launched last April. That scheme is specifically aimed at start-ups in the small-business sector. To be fair, the take-up of that product has been very good, and we are happy that it is still performing at a reasonable level.
Are all the banks doing something similar, or are they taking different approaches?
Mr Joseph McGowan (First Trust Bank):
Speaking on behalf of the First Trust Bank, I have no issue with any specific scheme. Small-business banking is at the heart of our business, and it is what we have been about in Northern Ireland for a long time. Anecdotes about the strain being felt by your constituents is a factor of the challenging economic environment that you described earlier, and there is a great lack of confidence among all banks’ business and personal customers. Our ethos, and policy, is not centred on specific schemes but involves engaging on a one-to-one basis with all our customers in order to see them through difficult times as best we can.
We have not taken any action to reprice, except in extenuating circumstances in which a customer’s profile has changed or a customer’s commitments to the bank have not been met.
From a broader industry perspective, we have reviewed and revised our business banking code in the past 12 months. That code acts as the common operating manual for business banking.
Furthermore, we recently reviewed and republished our statement of principles, which helps businesses as they begin to get into financial difficulty. A common message that we can all issue is that business owners should attempt to talk to their business manager — who is a key partner and service provider — as soon as they become aware that they are getting into financial difficulty.
All too often, business managers receive a call on a Thursday afternoon informing them that a business is unable to pay its Friday wage bill. Conversations should be about cash-flow forecasts for six or 12 months in the future. Regrettably, if an immediate decision is based simply on an urgent, crisis situation, discussions about finance become much more difficult. Therefore, an element of what we can usefully do is to encourage small businesses to talk more about their financial circumstances and to consider their business models more strategically.
An analogy that is often used is that, although a restaurateur may require funding, no amount of funding will fill a restaurant’s tables. That is achieved by reconsidering the business model and by the restaurateur’s entering into strategic discussions with his or her business manager.
In today’s BERR announcement about funding schemes, Lord Mandelson’s announcement about Business Link — an initiative beyond that traditionally offered by bankers and accountants, under which the body acts as an honest broker, or an independent adviser, to provide support for businesses when they are developing strategic thinking — may have been lost.
It is also worth pointing out that if one has a specific issue with a bank, all the banks have dedicated phone lines through which to contact them.
Has any of the banks undertaken across-the-spectrum surveys of its SME-client base in order to ascertain up-to-date information about those businesses’ needs, and, if so, is that information available?
We have not surveyed that element of our business-banking book; however, we have received feedback on our service from a broad range of business customers. In the present climate, we were concerned about seeking such feedback, but we received positive responses. Such results tie in with what Eric Leenders said: when customers engage early with their relationship managers in order to identify problems, if the business is viable, solutions can usually be found. The business may simply have hit a rocky patch. That feedback is anecdotal and not generally available, but it demonstrates that we are doing the right thing and, when customers engage with banks, the results are usually the right ones.
There is a gap between your experiences and the anecdotal evidence that all elected representatives constantly deal with — perhaps that gap should be bridged. I am concerned that not all the banks have adopted that approach, which is, given current circumstances, a prudent one.
We have not commissioned a survey on that. The product that I mentioned is under revision — we are taking feedback from customers on what else that product requires and the other needs that they may want it to address. Through our relationship managers, we take feedback from our customers regularly, and that helps to inform our strategy and thinking.
To return to Ian Paisley Jnr’s line of questioning, if such surveys validated the anecdotal evidence that Committee members have presented, the profile of your response could also be different. Is that not an issue that you should consider?
Mr Paisley Jnr:
I have an anecdote about a bank that one of the witnesses represents. That bank told a very credible oil distributor in my constituency not to give a drop of oil to his customers unless they are able to pay by cash or cheque at the point of sale. For years, that company offered 30-day credit on oil that they delivered, and the world went around. However, when that company now delivers oil, the person who answers the door is told to pay that day or no oil will be provided. That has a massive impact across the community, particularly on the elderly, stifles public confidence and will result in a deterioration in the relationship among businesses, banks and communities. That relationship is critical to helping us emerge from the current crisis. That is just one anecdote — there are countless others.
I understand what you say about making a profit, but you need to rely on the three “Fs”: you must address the issue of fees, you must be much more flexible, and you must be fair to customers and cut them some slack. People need to see banks behaving like that.
In response to the point about banks being fair to people, which Michael Kidd also mentioned, we are fair and reasonable to our customers. I do not want to focus on the example of the oil distributor for too long, because that sector witnessed huge hikes in the price of oil, which, for once, had nothing to do with bankers. Small-time distributors in that game have no option but to pay for oil when they pick it up from the terminal. That is a good example of a situation in which a small distributor lacks the financial acumen to project forward because of cash flow.
Mr Paisley Jnr:
The oil distributor I mentioned lacks the backing of your bank — he lacks the ability to go to the terminal and say that the Ulster Bank is underwriting what he purchases.
With respect, that works both ways. In that situation, it is important that banks engage and back such companies, but it is also important that the banks are given an early warning that the price of oil is rising. It is a two-way process — it is incumbent on banks to support such companies, but early engagement with them is also important.
I want to ensure that the anecdotal evidence from the various parts of the business-banking arena comes through. It is very important that issues in the SME sector emerge and are not overshadowed by the property sector, events in which have cast a significant black cloud over the economy. Sometimes issues that affect the SME sector get confused with those that affect the property sector, because some small companies began to deal in the property sector on the side, and some of the issues that they now face are not business-related. If those businesses could be separated from their involvement in the property sector, they would be very successful and would receive support from a bank. Therefore, such businesses are sometimes overshadowed by their involvement in the property sector.
Mr F McCann:
Several of the points that I wanted to raise have already been answered. To what extent will the new small-business finance scheme help? How will that operate in practice? Will it necessitate any risk-taking on the part of the banks, and are the banks currently prepared to take such risks?
As you will appreciate, we saw the details of that scheme only this morning. We understand that there are three components to it. There is a very significant £10 billion working-capital scheme, which is about Government guaranteeing portfolios of businesses. In turn, that will free up capital that could be lent back to small businesses. It will be for individual banks to understand the economics — there is a premium for that guarantee — and how best they could deploy any capital that is freed up. That is a point to which we may want to return at a future date.
More immediately, the £1·3 billion enterprise finance-guarantee scheme is more akin to the more traditional small-firms loan-guarantee scheme. Its significant attraction is the ability to refinance, for example, an overdraft when an element of that overdraft is what we in the industry might call hard core — it is a residual overdraft that never fluctuates, so the account does not necessarily swing back into credit. Separating that and financing it on a loan and, at the same time, maintaining the overdraft facility at the level that was originally agreed, frees up further working capital.
The important consideration is that it will be for the lender — the bank — to assess the risk. Pivotal to that assessment is the provision of business plans, cash-flow forecasts and supporting financial information so that the underwriting decision can be taken in that way. Yes, there is a premium for that Government guarantee, and that premium is payable by the owner or manager. We understand that it is 1·75%, which is discounted by 25 basis points from the standard rate. The detail makes reference to the early payment of that premium, but I do not yet know what “early payment” means in that context. As the details emerge, I am happy to pass them to the Committee.
There is also a third element — the capital for enterprise fund, which is a slightly smaller fund of £75 million. That is made up of £50 million of Government money and £25 million of bank money, and is designed for instances in which debt finance is not necessarily appropriate and equity finance may be more appropriate. That is all that I know about that scheme at present. I am happy to pass greater details to the Committee for future consideration.
Mr F McCann:
This is a different question, but it is something that was raised with me last week. You mentioned property earlier — I heard of a developer who went to his bank and said that he wanted to proceed with a development. The bank was more than willing to lend him the money, and he appreciated that. However, he was not able to proceed with the development, because the people to whom he expected to sell the development could not acquire mortgages.
For a number of reasons, the property market is probably the subject for a separate inquiry. In the UK — particularly in Northern Ireland — we must recognise that there has been a house-price boom. In Northern Ireland, it appeared to spike quite acutely from 2004 through to 2007. We are now seeing a correction in that pricing.
Among the community, there is a view that that is a necessary correction, because houses were overpriced. Although I cannot be drawn into commenting on that specific case study, one of the considerations for that developer will have been — at the time of acquiring the land for development — the extent to which it could be developed and then sold at a profit. That becomes much more difficult in a falling market. From what you have told me, it sounds as though the viability of that proposition fell away because the property market had moved on.
We have seen a drop in demand. Several potential home owners have made the rational decision to wait and see what happens to house prices over the next six to 12 months. That is happening not only in Northern Ireland but across the United Kingdom. The number of application-approval rates is flat as a result of consumers waiting to see the direction that the property market will take. Consumers do not want to find themselves in negative equity or purchasing a depreciating asset.
Mr F McCann:
The developer wanted to go ahead with the scheme, and the bank was willing to lend him the money to do so. However, he could not proceed with the scheme, because the banks were not giving mortgages to those who wished to buy his property.
We represent about one fifth of the property market, and there are others at least as well equipped. There was a suite of mortgage offerings on the table, to the point that Ulster Bank mortgage advisers still have targets and are still expected to tell customers about the mortgages available. There is a question as to whether that is a supply-side or a demand-side issue. My argument is that, to an extent, there is a demand-side dimension of “wait and see”, and that plays back into the broader theme, which is one of confidence.
The Ulster Bank is targeting its efforts on the first-time-buyer market. I deal with personal banking, and some house builders in Northern Ireland have been in my office for the first time, as I have been working with them to try to come up with schemes. We have announced our momentum mortgage, and we are extending it to more house builders. The current rate is discounted to our mortgage rate — it is 3·87%. We have said that £100 million in mortgages are available. However, with a rate of 3·87%, I do not believe that our price, our borrowing rate or our availability is putting off house buyers at the moment. Confidence in the market is putting them off.
The element of house buyers waiting to see whether house prices will come down is starting to wane. Research is showing that house prices in Northern Ireland — particularly new-house prices — are bottoming or have bottomed. However, confidence in the market and in jobs is putting buyers off.
The first-time-buyer market is in all our interests, because those buyers then go off and buy furniture, and so on. However, when builders have sold their stock of houses, will they go off and build more houses and create more employment, or will they put their money in the bank and wait? That is the next phase.
Mr F McCann:
They must get over the first hurdle.
Exactly, and that is what we are trying to target. However, I do not deny that it is hard going.
In that context, the floundering of the Housing Executive’s house-sale programme is further evidence that people are reluctant to take a punt.
What is your understanding of the logic and rationale of the various UK Government interventions to assist the banks, whether that be recapitalisation or access to Bank of England loan guarantees?
There are several objectives, and it is sensible to ensure that we distinguish those separate objectives. For example, part of the recapitalisation was to stabilise the banking industry, as opposed to providing liquidity. The loan-guarantee scheme and other initiatives were designed to encourage lending in the marketplace. Those are two slightly distinct aspects of support from central Government to banking. The argument has been well made that, in a capitalist society, banking and flow of funds is central to the economy, and the conduit for that is banking. It is necessary for central Governments — not only in the UK, but worldwide — to support their banking infrastructures, and that has happened, globally, to a greater or lesser extent.
There then follows the question about the extent to which banks are able to lend. Some of the tensions that exist have already been touched on. Some of them are organic, or from the business rebuilding its balance sheets through capital growth, while ensuring that the regulator’s priority for a robust capital base is met. That means retaining capital in the business rather than lending it to grow in order to generate profit that builds reserves. That, in turn, increases the amount of capital that is available to lend.
Part of what those schemes are intended to achieve, particularly for guaranteeing portfolios, is to free up capital, and thus accelerate the growth in available loan capital. Those, sensibly, are slightly different activities. Lord Mandelson has announced a more specifically targeted initiative for a particular sector. That has the wider economic benefit of generating employment and spending — the points in the cycle to which my colleague referred.
Dr Farry :
In essence, are there two different objectives? Is the first to rescue the banking system and put it on a secure footing, and is the second to boost the economy and help it out of the downturn through various schemes?
Do you also agree, Mr Leenders, that, unlike a retailer or a manufacturer, of which plenty have gone bust, it has been accepted that the Government will intervene to prevent banks going out of business, because of the central role that they have in the economy? Such an implicit guarantee from the Government means that, although banks are private organisations, they do not face the same degree of risk as other businesses. The practice of the Government over the past year to 18 months has been to step in to prevent a bank from going bust, because of the implications for the economy.
The situation is slightly different from that which existed up to 18 months ago. Those banks that accepted financial support from Government have done so under clear and public conditions. Those conditions are designed to ensure that the banks involved play their role in making finance available, particularly for home loans and for loans to small businesses.
I believe that the oversight body, UK Financial Investments Ltd (UKFI), will discharge its responsibility to ensure that the banks play their part. Other witnesses in Committee can talk that through in more detail. However, I do not think that any bank is, in any sense, suggesting that it is at arm’s length from the economic situation in the markets in which it operates.
In the context of this morning’s discussion, no bank would suggest that it is not part of the community, in which banks seek to play an active role, and that includes for small businesses. Considered from an empirical perspective, across the UK, a growth in support is being seen for small businesses. There is also a visible commitment from banks to lend support in future. In giving those commitments, we return to the point about generating confidence — we are saying that we are here. A colleague made the point that his institution has been in Northern Ireland for 170 years and wants to be here for a further 170 years. Other witnesses may not know their chronology, but they will support that commitment from their own perspectives. Therefore, the banks recognise their role in the community. They will actively support it where they can. They must understand the viability of propositions to which they lend. There is some falling-away of applications, particularly around longer-term investments, as owner-managers, understandably, play a wait-and-see game.
There are some short-term-liquidity cash-flow issues. The sentiment at this end of the table is that it is important that owner-managers talk sooner about cash-flow issues, rather than talk about them when they reach crisis point, because that will make the discussion far more difficult. There is also the question of pricing. Repricing has occurred against the increased risk, and it has taken place in the absence of those downward competitive pressures that are seen in a more benign economy.
On the issue of accountability, you said that banks see themselves as part of a community, and obviously that is correct. The primary accountability of a bank as a private-sector organisation is to its shareholders, but do you recognise that there is also accountability to the taxpayer, in that the taxpayer is essentially funding much of the back-up to the banking sector? Flowing from that, how do you see your accountability to the Assembly? We welcome your presence here today, but how do you view your role? I appreciate that some of the banks here are not in receipt of Government support to the same extent as some of their counterparts in Great Britain, but, theoretically, that support is there if any of the banks runs into difficulties. Where does the accountability of the banks lie?
Ulster Bank is 58% owned by the UK taxpayer. Ian Paisley Jnr said earlier that we all must work together. I have 600,000 customers for my various products in personal banking in Northern Ireland, and Henry has additional business customers. We are an integral part of the economy here. That is why the UK Government did not allow banks to fall, because we are systemic and crucial to the overall money system. It was not done out of charity or out of love for bankers, that is for sure. It was very clear that we must keep the banks going in order to keep money flowing and the economy going.
I am in no doubt about my obligations. We must act very responsibly. We are all subject to the Treating Customers Fairly (TCF) initiative from the Financial Services Authority (FSA), which comes into effect at the end of this year. We have been working hard to be compliant with that and to attain the six clear outcomes outlined in the initiative on how we should treat personal and small-business customers. There is an anecdotal element, which existed before the credit crunch, but it is now more visible, notable and relevant. It is important that we continue to listen, and, on Ian Paisley Jnr’s opening comment, it is important that we work with the Committee, and that we listen to its feedback and to members’ anecdotes. There are always two sides to every story. Sometimes we may not have acted fairly, and it is important that we admit that.
Eric made a point about the need to adjust your own balance sheets in order to ensure that the banks are secure. He also mentioned the role that you play in trying to stimulate the economy. Given the bigger situation of the exposure of the banks in Northern Ireland, relative to the rest of the UK, surely an argument exists for allowing the banks here to do more and to offer more attractive packages to businesses than their counterparts in the rest of the UK do. Surely banks here are in a better position to pass on cuts in interest rates, because they do not have a requirement to adjust their balance sheets, as their counterparts do.
The structure of business portfolios is such that the vast majority of lending is priced above base rate so that cuts in interest rates are passed straight through, and the residue — the remaining element of that lending portfolio — would typically be set at a fixed rate, where the business owner has determined that he or she wants continuity and consistency in cash-flow planning, which, of course, has its own benefits. In headline, rates, for example, are passed on. It is, of course, a competitive market, and the banks will compete among one other to win business. That is always going to be the corollary to the pricing that is put in a marketplace. If an offer is uncompetitive, one will find that that offer is superseded by others’. In the revised statement of principles that I referred to earlier, we have done further work on making it potentially easier for owner-managers to switch banking relationship so that they can take advantage of better offers.
Alistair Darling made it clear to the banks that took up the offer of Government support that, despite that money going in, they must act commercially. That is true, but we must also treat customers fairly. It is difficult to differentiate between the two stances; it is important to examine each case carefully and on a commercial basis.
You raised the issue of the banks being in competition with one another. We are all aware of the situation that pertained when the economy was doing well; — there was a great deal of advertising, and the banks were aggressively marketing themselves to new business and personal customers. With all due respect, I am conscious that you are all here as one voice, and no doubt you are friendly behind the scenes, but can you give us an assurance today that there is proper competition in Northern Ireland’s banking sector?
Giving you an assurance is tricky. I can assure you, however, that I hate these guys and that I am out to win their business. [ Laughter.]
On a serious note, we have been subject to a full Competition Commission review, which examined current-account banking in particular. The fact that we have different offers and different prices, and that we are targeting different sectors, shows that this is no cosy cartel. I have my business objectives to meet this year, and I am sure that my competitors have theirs, yet there is still competition for new business, and particularly for new customers, and that will continue.
My final question concerns the Basel Committee on Banking Supervision’s new recommendations on risk management. What impact will they have on credit lending locally?
I do not wish to bore the Committee with the Basel Committee’s regulations. However, I am sure that I speak for the rest of the guys here when I say that most of the banks have worked throughout 2008 on those regulations, and most of the impact of the Basel Committee’s recommendations has been achieved.
The way in which some of the banks approach the balance sheet and utilise it to best effect has changed to some degree. In our case, there are two aspects at work. First, are there unutilised limits to that approach? An article in today’s ‘Financial Times’ describes how some banks have reduced some of the unutilised limits. I cannot deny that that has happened; the sums of money that the banks set aside against that approach is costing them money.
Secondly, the banks are working to the benefit of small-business customers, and they are more focused on a greater degree of invoice discounting, where that is seen as a capital-light product. All the banks that are represented here would say that they have utilised that measure. Some customers resisted that approach, but, where the customer has worked with it, the result has been that the product has shown itself to be efficient and practical, driven as it has been by the Basel Committee’s recommendations.
The Basel Committee’s recommendations have affected how we manage our balance sheets. I do not believe that it has had a direct impact on our approach to credit. The fundamentals of lending have probably never been more relevant than they are today. For all their regulatory complexity, I do not think that the Basel Committee’s provisions change the fundamentals of lending. Certainly, the small-business market is still what matters.
I have one final point to make. Today’s exercise has been extremely useful. It is obvious that we are expecting difficult economic circumstances over the course of 2009, and it is to be hoped that we can avoid those circumstances going much beyond this year, but we will have to be realistic. Can we take away from today’s meeting that this is not a one-off, and that there is a willingness on the part of the banking sector to have an ongoing engagement with the Assembly, whether at Committee, Executive or individual ministerial level, and particularly over the coming months?
We would be absolutely delighted to continue the dialogue. We have met the Northern Ireland Assembly in various Committees and guises since last summer. We are in front of the Committee again today, so we certainly see it as an important communication channel. It is important that we have a shared understanding of the issues that our industry and our community face in the wider recession. Therefore, there is commitment on our part.
Ms J McCann:
Given that, in the main, banks and other financial institutions are responsible for the current economic downturn, do you not feel that there is a responsibility on them to address the situation? Based on some of the comments that have been made, it seems that the Government will never allow banks to go under, that they will always be on hand to bail them out and that taxpayers’ money will always be available for the Government to do that. It will be the ordinary people who will suffer in the economic downturn.
Banks are calling in credit and loans from businesses, and, as a result, more and more people are becoming unemployed. It is not just small and medium-sized businesses that are affected but large businesses, too — we saw what happened to Woolworths, and so on, before Christmas. When people become unemployed, they have problems repaying their debts. I am particularly interested in mortgages and home repossessions. People’s homes are being repossessed, and they then have nowhere to live. That is the reality of life for many. The waiting list for social housing is so long that those people are living with relatives or in other cramped conditions. People are losing their jobs, and they cannot pay their bills. Do you not feel that banks have a responsibility to ensure that that stops happening?
I want to raise two more specific issues. The base rate is currently 1·5%. Obviously, the interest rates were cut so that the banks would pass the rate on to consumers, and thereby stimulate the economy. How do the mortgage rates being offered by local banks compare to that current base rate? If the rates do not compare, what is the explanation for any of the differences?
Secondly, have the four main banks here bought into the homeowner mortgage-support scheme, and are they running with that scheme, so that people’s homes will not be repossessed?
I will deal with your final question first, if I may. The consultation period on the homeowner mortgage-support scheme, which closes today, involved stakeholders who would be responsible for bringing the scheme to life. We have had an intense series of meetings with the Department for Communities and Local Government, meeting two or three times a week throughout December and January, to see how we can make that scheme work. There is a commitment to get it off the ground. It would sit among the portfolio of support mechanisms, such as homeowner rescues and a commitment not to repossess properties within six months of an individual’s getting into arrears, unless there were specific, extenuating circumstances. Those measures would, of course, sit alongside the initiatives and collections programmes that each of the banks already operates. Ultimately, it is not a particularly cost-effective exercise to repossess property, so, economically, and — you are quite right — emotively, that is a last resort. We recognise that.
We mentioned earlier that the banking fraternity of Northern Ireland makes up a small proportion of the overall home-loan market. The number of repossessions is yet smaller still. A couple of the banks in Northern Ireland have provided some figures to me for 2008. I do not have a complete set of figures, so I cannot be specific, but I can say that I anticipate the figure certainly to be fewer than a dozen home repossessions by the banks. Therefore, that is not necessarily an issue to be directed specifically at the banking sector.
Your second point was about passing on pricing cuts. It is useful to explain the half a dozen or so competing tensions that sometimes preclude banks from passing on cuts in full, although, during this discussion, others have said that the vast majority of those cuts has been passed on. Furthermore, a minority of homeowner-mortgage holders feels the effect of those cuts, because mortgage holders with a tracker rate see their rate move in accordance with the movement of the index rate, typically the base rate. Mortgage holders on fixed rates have fixed into a rate for a particular term.
The base rate is a mechanism that the Bank of England, as a central bank, uses to control inflation. The price for funds for banks is, typically, a three-month London inter-bank offered rate (Libor). Although the base rate is currently at 1·5%, the three-month sterling Libor is something like 2·33%. Therefore, the cost of funds is significantly higher than the base rate. In passing on a base-rate cut in full, a bank or a lender is absorbing that differential in the cost of funds. That element must be taken into consideration, along with the cost of risk. Fundamentally, the pricing of interest is a reflection of the risk that is attached to a loan, and there are currently greater risks in the economy.
As with other businesses, banks face increased overheads, which also must be covered. It was mentioned earlier that significant downward competitive pressure on small businesses forced down prices, and that has also been seen in banking. Although that pressure is easing, it is acknowledged that that risk had been underpriced owing to competitive pressures and other factors.
At the same time, we talked about the need to rebuild capital. Interest income is a core income line that provides the wherewithal to rebuild capital bases to provide capital to facilitate further lending.
Finally, each reduction in interest rates reduces the disposal income that is available to pay a return to savers, so a balance must be struck. It is important for banks to attract deposits, because those deposits get lent out to, for example, small businesses.
A complex matrix of competing factors must be thought through when a base-rate change is announced. Substantial amounts of those base-rate cuts have been passed on to consumers, and that has to be beneficial for consumers who are affected.
Ms J McCann:
Therefore, the risk factor that banks take is passed on to the consumer in the form of a price rise, just as the energy companies did with price hikes in energy costs.
That is one component, but I mentioned other areas. For example the cost of funds for banks is slightly different and is currently quite a lot higher. The Libor rate is 2·3% and the base rate is 1·5%. Those half a dozen or so factors must all be taken into consideration when pricing products in the marketplace.
To put more flesh on that bone, the Ulster Bank’s new momentum mortgage, which is targeted at first-time buyers, has an interest rate of 3·87%. The cheapest cost of money for the bank is 2·3%, so one can work out that our margin on that mortgage is 1·5%. That takes risk into account on what is a high loan-to-value mortgage, which we were being criticised some months ago for giving. We are still trying to support the economy with those loans, and I believe that a margin of 1·5% is a fair price for everything that we are doing.
It is worth repeating that Ulster Bank and the three other banks represented here account for one fifth of the personal-mortgage market in Northern Ireland. I would love us to account for a greater share, but we are only one fifth of a five-fifths story. The other four fifths are with the former building societies, and with local building societies such as the Progressive. I have looked at the figures, and I guarantee that their rates are invariably higher than ours, and that they have not passed on as many cuts as we have. I do not know the repossession figures for the building societies; however, in 2008, the figure for Ulster Bank repossessions is two.
We are a proponent of the scheme that RBS announced, and that the UK Government have followed, and I believe that we are very responsible in the areas that you mentioned. It is not in my interests to be hard on Northern Ireland customers, because they will remember that when the good times come again.
Mr Paisley Jnr:
Help us through the matrix, Eric. You know a good deal when you see one, so if you were a first-time borrower who was looking for a residential mortgage, where would you go? Given the suite of offers on the table, which would you choose?
If I were a first-time buyer, I would think that a very attractive offer from Mr Bamber. Although I would like to take his assurances, I have not shopped around; certainly, I would want to assure myself that the building societies were indeed less competitive than the product that he mentioned.
Mr Paisley Jnr:
The facts are pretty clear, and I think that Mr Bamber is absolutely right. I understand why the Abbey National, Barclays and the Halifax are not here today — their fees are a disgrace. I criticised you for charging fees of £999 in one instance, but, on average, their fees are around £2,000 to £2,500.
I buy into what Mr Bamber said about customers getting a better deal with the banks than they can with the building societies. However, even among the banks, there is a number of arrangements available. Where would you go? Where should I tell my constituents to go? Where should Jennifer tell her constituents to go? What advice does the British Bankers’ Association have when it comes to getting a good deal out of the banks operating in Ulster?
With respect, Chairman, it is not my place to put forward the best buys; there are plenty of others in the marketplace to do that. I am afraid that I must respectfully duck that particular question.
I think that we would all say that.
Mr Paisley Jnr:
I notice that the representative from the Northern Bank is saying nothing — you have been very quiet, Ben.
Mr Ben Christensen (Northern Bank):
We have not changed what we are offering. We still offer 100% mortgages to first-time buyers on an affordability basis. Last year, there were no charges for those people who had a customer package with the bank. In 2007-08, we did not repossess any homes. We continuously work with our customers, as is clearly in our best interests, and that will not change. Whether we have the best offer, I cannot tell, as I have not been updated on the figures.
May I ask a supplementary question on the homeowner mortgage-support scheme? I acknowledge that 80% of the mortgage lenders are not represented here; however, eight of the largest lenders covering 70% of the mortgage market have already said that they will support the new scheme. Only one of the banks in Northern Ireland has said that it will be part of the scheme. Why will the other three banks not be a part of the scheme?
We will continue to do things as we always have done — by following our procedure. The mortgage-support scheme does not add anything to our current procedures. We already support working together with customers, as is evidenced by our repossession figures.
The Government said that they will guarantee deferred interest payments for up to two years. Is that part of your own scheme?
It is not — deferral has not been necessary.
You have not signed up to the scheme of which deferral would be a part?
That scheme was developed within the home-lender practitioner panel — forgive me, I cannot remember the specific name of the committee — and was a commitment from those present to develop an initiative. That initiative has yet to be finalised. There is a great deal of granular detail — not least, of course, the extent to which the scheme might extend beyond those that provide a first charge to include those who provide a second lending charge.
As the details and package are finalised, it will be open to all first- and second-charge lenders to consider whether the scheme adds anything to existing practices. Therefore, it is not as though anyone has deselected themselves from the process.
I seek clarification, because I am not familiar with a lot of banking language. What are first- and second-charge lenders?
If security is provided over a property, a legal charge is given over it. The first person to take security takes the first legal charge, and so on. For example, typically, the purchase of a house is a large loan, so the security given is a mortgage over the property, as the first charge, because it is a loan over the property.
A subsequent higher-risk loan could be supported by a second charge over the property if there is equity in it. It is about ensuring that the scheme is as comprehensive and inclusive as possible. The broad parameters for the mortgage are £400,000, and individuals can have savings of up to £16,000. Therefore, it is about trying to help a broad constituency of people with significant mortgage commitments through a temporarily difficult period — up to two years — by capital relief and interest roll-up. When details beyond that have been finalised, we will provide them to the Committee separately.
Therefore, the broad principle of the scheme was to provide additional protection and reassurance for your client base, which is feeling vulnerable. I take the point that Ben made about offering a product that may be even superior to the baseline that is being offered.
However, the essence of the scheme would require that only those people who intend to maintain their ability to foreclose have any real advantage in staying outside the scheme. If a better product is being offered, and there is a low-cost benefit in being part of a collective approach by the sector, it seems to me that this is part of the partnership between the political system and the financial system. We are not about taking advantage or punishing further the small businessperson or homeowner. Therefore, let us join the compact, and let us subscribe to a set of principles that extend as much protection as possible in these very difficult circumstances.
You make a good, factual point, which was supported by the Consumer Council in its evidence to the Committee. First-charge lenders — that is, the Northern Ireland banks and former building societies — offer many mortgages, but they have not been responsible for the repossessions. Second-charge lenders are the type of lenders that advertise on daytime TV offering consolidation loans, and it is they who are pursuing the repossessions strategy as a means of getting repaid.
Repossessions should be avoided. Some members will recall the levels of repossessions in England in the 1980s, and it is a situation in which everyone loses. The banks also lose an absolute fortune.
It is worth noting that the Government have stated that they are considering a state-backed payments holiday for struggling homeowners. Indeed, that is referred to in today’s ‘Financial Times’. We would support that idea. Therefore, it seems the UK Government have made further indications that more help is to come in that area, and we welcome that.
Mr F McCann:
You said that the blame for repossessions lay at the door of building societies and other financial institutions. Are they part of the broader banking fraternity? Do they sit on whatever board controls the financial system?
For clarification, I said that I do not believe that the evidence supports that it is the former buildings societies that are responsible for repossessions. I think that it is second-charge lenders that are offering personal loans, and so on. Eric can answer the broader question.
If the mainstream financial sector is retrenching and adopting a more conservative approach, does that not open up the market to second-charge lenders and increase your client base’s vulnerability?
On the one hand, it does open the market. However, one the other hand, second-charge lenders must find their money, liquidity and funding. If the funding is not available and global liquidity has dried up, they will face challenges in securing funding.
The British Bankers’ Association represents the banking industry. The wider finance community uses a different business model, and, with the possible exception of building societies, does not rely on garnering deposits and lending people’s savings to borrowers. That community searches the money markets for tranches of liquidity to lend and packages it as securitisations, which are sold back into the market. That return constitutes the lending capital.
The bank representatives can outline their business model in more detail. They give performance guarantees about those securitisations and certain warranties about income and the performance of loans. Therefore, they, potentially, take a different approach to repossessions. I am not fully equipped to answer that question; others in the sector could offer a more comprehensive reply.
Mr F McCann:
You said that you represent a small part of the mortgage market only. Newspapers report stories of repossessions every day, and thousands of people are losing their homes. Can you, as part of that broad financial sector, pressurise those building societies? Some well-known building societies take the lead in repossessions and appear to show no sympathy when chasing mortgage debt.
My influence on that sector, outside banking, is, unfortunately, limited. I understand that the Council of Mortgage Lenders actively considers the Northern Ireland home-loan sector. I will raise the issue of repossessions in Northern Ireland with that organisation’s director-general, Michael Coogan, and the director-general of the Building Societies Association, Adrian Coles. I will encourage them to respond to the Committee in writing.
Have banks increased deposit requirements for mortgages? Has that measure increased pressure on first-time buyers?
The representatives at the table have different portfolios in their shop fronts. Services range from 100% loan-to-value mortgages, which are still available, to loan-to-value ratios of approximately 80%. I will allow others to describe their portfolios in more detail.
We have reviewed our loan-to-value ratios. The economic climate is less vibrant now, and there is a greater risk of borrowers becoming unemployed than in the past. Therefore, if the risk has increased, some sectors need to review loan-to-value ratios.
Deposits are not required for momentum mortgages, because the builder provides 5% and we provide 95%. I research my competitors’ products, and, therefore, I know that the Northern Bank still offers a 100% mortgage. Banks have different products in their portfolios and offer different services, but I do not anticipate a widespread reduction in loan-to-value ratios. There has been caution in some areas, such as in the buy-to-let sector and for one-bedroom apartments, but mortgages are available.
I now know how the person at the back of a long bank queue feels.
Thank you for attending the Committee meeting. I hope that this is the start of a more productive and co-operative relationship. Many of the issues have been covered, so I will touch on two points. You mentioned the reasons that have been given for the restrictions in the passing-on of some of the base-rate cuts. The base-rate cuts also impact on the interest rates that are paid to current-account customers — as well as on borrowers’ overdrafts.
Given that the base-rate cuts are bound to impact on both those sides, has there been any level of differential cuts by any of the banks between the borrowers’ side and the current-account side? Have the cuts bitten deeper into the current-account side or into the borrowers’ side? If there is a differential, why is that the case?
Typically, a personal current account is a transactional account, not a savings account. In providing deposit or savings rates, the first place to look is a deposit or savings account. There is a downward pressure on savings rates, and that is unfortunate, because particular demographics rely on deposit returns as part of their income. That is a function of the movements in base rates and the pricing that falls off the back of that.
We have seen attractive personal-current-account credit-interest pricing as part of acquisitive strategies to buy market share. In GB, we have also seen initiatives, such as a £100 sign-on-cum-cashback fee, to buy in business. However, the typical rate on a current account is quite low, because it is not a savings vehicle. Therefore, it has not been impacted on greatly by changes to base rates, as there is a diminishing return in repricing at that sort of level.
We do not pay credit interest on current accounts. Our market research found that customers do not see that as a reason to choose a current account. They are influenced by such factors as the accessibility of branches, for instance, and that is why we have not closed branches. Our research shows that we are well represented in that respect.
We review debit interest rates every time that there is an interest-rate committee meeting, which is held after each change to the base rate. I chair that committee. Last week, we reviewed our overdrafts. We reduced them by more than the base-rate cut, because we had not reduced them following the previous base-rate cut. Credit-card rates were reviewed and reduced, as were personal loans. As a balance, I want to attract more deposits, because there is a shortage of money out there. Equally, I want to continue to encourage the Northern Ireland consumer to spend, within the realms of reasonableness.
If I am too radical with that, I will be criticised. People will say that banks are falling back into their previous cycle, and they will remark how easily banks forget what can happen and that they will get more bad debt. It is a fine balance, but I am paid to achieve that balance.
I declare an interest as an Ulster Bank customer. I understand that RBS, which owns the Ulster Bank, has made pledges on the pricing and availability of overdrafts for business-banking customers. Is the Ulster Bank committed to that pledge by its parent company? Will the same position be available for business-banking customers in Northern Ireland?
Yes, the Royal Bank of Scotland went out with that pledge around 1 December 2008. It took a while for us to achieve clarity on the actual pledge, and it was honoured by the Ulster Bank and the relationship managers who deal with small and medium-sized enterprises. That commitment went out on 17 December. We are pledged along the lines that RBS has given the commitment.
Eric, you said that the reason that the base-rate interest cut was not fully passed on to customers was because of overheads and other reasons. You said that one of those reasons was in order to protect savers. What other schemes have banks introduced to protect savers, other than not fully passing on base-rate cuts?
Are you alluding to deposit-protection or protection-guarantee schemes?
Something that will protect savers — something that will guarantee that my money in the bank will be safe and will be there if I go looking for it.
We have been looking at that for two years now. It is an area of keen interest for the European Union as well. We see that there is value in extending the level of the value of the Financial Services Compensation Scheme (FSCS) — the lifeboat, if you will — to £50,000. We have a strong view that the issue is about access to that money, and not necessarily about payouts after a bank has failed. As such, we are very keen to see the Banking Bill become law at Westminster and, through the ongoing consultation with the Financial Services Authority, greater emphasis be placed on maintaining access to finance, in the knowledge that there is a level of protection of £50,000.
The level of depositor protection through the deposit-guarantee scheme, which the Financial Services Compensation Scheme administers in the UK, was not an issue two years ago. It did not feature, and it is important that, as part of a financial-education or financial-capability programme, we help consumers to understand that if they deposit balances in any deposit-taking institution, a level of protection exists; thereafter, that protection is no longer there.
We have not had any instances in the UK in which depositors have lost money, either through the Financial Services Compensation Scheme or passporting into other schemes. Those who had deposits with Icelandic banks, for example, have had their money returned. That certainly served as a reminder that we need to ensure that consumers be made more aware of risks across the industry. A couple of years ago, through the regulatory community, we thought of that as less of a priority than other information about consumers’ accounts.
My other question concerned interest-rate cuts on credit-card accounts. What are the banks doing to protect people who have reached their limit on a credit-card account and are finding it difficult to pay the money back? What schemes are banks introducing there, because such difficulties are becoming more and more common every day?
Every day that goes by, and this happened before the credit crunch and is happening during the credit crunch, we regularly consolidate credit-card debt into personal loans. I am sure that the other banks also do that. Credit cards are an expensive form of borrowing — the most expensive personal form of borrowing by banks, in fact, because of the higher risk profile and experience. People who have reached their limit on credit cards would be invited to come in and receive whatever financial review that the bank offers.
We offer a customer-service review, which takes customers through all their financial commitments, and advises them on how best to use their money, how best to save and how best to package their finances.
Typically, we find that some customers are using credit cards, or taking longer-term loans when a three-year personal loan would be more sensible. The good news is that Ulster Bank credit-card borrowing for Northern Ireland is controlled in Belfast, rather than in a remote location.
That is some comfort, I suppose. Do you see any change in the way in which people use credit cards? Has credit-card use increased in the past year?
We see some increase in usage. I am responsible for ATMs as well as credit cards. Reliance on credit cards is increasing, but transaction spend is down, because consumers are already pulling in their horns. Withdrawal of cash from our ATMs is also down, and that is another sign that people are spending less. To answer your wider question, we are definitely witnessing an increase in arrears on credit cards. It is with such arrears that that we expect to see problems emerge. The credit-card-arrears portfolio is the one to which I would turn first, and it shows signs of stress. Interestingly, our mortgage arrears are at the same level now as they were a year ago.
My question is also on credit cards. Have interest rates charged on sums outstanding on credit cards fallen, in view of the recent cuts in the base rate?
Rates have fallen. We reduced them, and we also tided up quite a few rates as well. We lowered them further than the base-rate cut.
To what level?
There are various rates, as we offer different cards and a 0% finance offer for balance transfers. The highest level is 19∙9% which, against the base rate of 1∙5%, is expensive, but that is high-risk borrowing, which is the borrowing that definitely goes into difficulties first.
Famously, Matt Barrett, the chief executive of Barclays Bank, said that he would not recommend that new customers use credit cards. They should be used for certain convenience purposes, and I do not advise people to put long-term debt on them. They are an expensive form of borrowing.
I apologise that I am unable to contribute. I look after business banking, so I have no detailed knowledge of credit cards. If you want me to, I can provide the information to the Committee after today’s meeting.
First Trust has not reviewed its credit-card interest rates in the past couple of weeks, but the interest rate on our main credit card — we offer a range of rates — is 14∙9%.
Many of my constituents have approached me on the subject of charges for unsecured loans. Have the rates charged for such loans been reduced, in view of the recent cuts in the base rate?
Our rates have come down. Many of the banks have different bands and offer different prices for different bands. It costs as much to set up a personal loan for £1,000 as it does for one of £15,000, so there are different rates. We reduced our rates after last week’s base-rate cut because we had not reduced them recently. We review them less frequently than we review other rates. The key point is that existing borrowers are on fixed rates already — only new lending is affected.
I have no figures to hand.
I return to the issue of help for small businesses, particularly the issues of unauthorised overdrafts and unsecured loans. A small business in my constituency asked me for help. It had approached its bank, asked for an unsecured loan and was offered a crippling interest rate of 22%. It has subsequently had to lay off staff and close. From what you have said in your evidence today, I understand that, apart from the local banks, no one offers liquidity to small businesses in Northern Ireland.
You talked about the Secretary of State for Business, Enterprise and Regulatory Reform announcement on the small-business finance scheme. However, the public perspective is that the Government are bailing out the banks. The UK Government and the Irish Government announced rescue packages of £500 billion and €10 billion respectively for the banks in order to stimulate the economy, yet our small businesses are going to the wall.
The banks are supposed to pass on taxpayers’ money in the form of loans to businesses and consumers to stimulate the economy and to boost consumer and customer confidence, and they are supposed to pass on the cuts in the interest rate. However, I have heard more today about assessing risk and the viability of businesses and customers. However, when the banks were repeatedly selling debt — I know that you call it something else — and lending more, you were not assessing the risk but passing it on. It seems that, rather than passing on the benefit to small businesses, consumers or customers, you are passing on your bad nerves and anxiety to them.
I have not heard anything today that would encourage small businesses to ask for help from the banks. Nor I have not heard anything that indicates to me that the banks will respond by lending money.. I hear much about offers of advice and about how talking is good, but small businesses need money, and I see no sign of that cash flow’s being delivered. All I see is that a bundle of bad nerves is being passed on to customers.
I do not accept that those comments reflect our answers to the Committee’s questions. I am not only in charge of personal banking but am a director of the Ulster Bank and, therefore, have overall responsibility. Overall, the Ulster Bank is supporting Northern Ireland to the tune of more than £10 billion at present; that is the amount of our current lending, and we are not drawing in loans willy-nilly.
I have been in banking for 31 years, and, as a director of the bank, I chair some of its credit committees. Henry leads the business-banking sector, and we assess risk now in the same way in which we did before. I have been through two recessions, this being my third, and risk will be heightened during this time, but banking is about risk. Did we get some of our lending wrong? Yes, but in my experience, being genuinely involved in risk means that some incorrect lending decisions will be made.
Are we responsible for the world’s problems? Everyone has identified banks as being responsible, but there are big differences between investment, corporate and personal bankers. The world’s banking problems started in America and spread across the world because of investment banking. RBS’s investment-banking arm undoubtedly caused its problems, but personal and business banking did not get off scot-free, and some of our loans will not be repaid. People will see an increase in the provision of loans in 2009-10. That, and supporting customers who thought that they could repay us but cannot, is the business of risk.
I am sorry, but I do not accept your comments, Ms Purvis, and I am sorry that we have not left you with a different impression.
I want to add to what Mike said about supporting business, and if we did not get our message across properly, I apologise. Other banks can speak for themselves, but it is not correct to say that the entire banking fraternity here is not doing anything for small businesses. I know that the Bank of Ireland launched a specific initiative earlier this year, but all banks have supported small businesses in honouring their commitments to make capital repayments and meet interest charges. What happens first is that capital repayments are rescheduled or, in many cases, not made at all.
Therefore, it is important that small businesses recognise that the banks, by taking such steps, support them. The help that banks provide with capital repayments affords small businesses additional flexibility and support. Through the most difficult times, the Ulster Bank has incurred a significant bill to provide interest roll-up to small businesses that cannot meet their interest commitments on particular loans. Again, that has provided small businesses with some flexibility on their cash flow.
Therefore, it is unfair to say that the banks are not taking any action; they have been taking action throughout 2008. We will continue to work with our customers. I cannot emphasise enough how important it is for the customer to engage the bank as early as possible. Only then can lending to the customer be restructured.
I am glad that I asked that question, because, earlier, when he asked a similar question, Simon Hamilton did not get those answers.
As I tried to say earlier, the best way in which o deliver support for our customers, particularly our SME customers, is on a case-by-case basis, by using the types of measures that Henry described in order to deal with a customer’s specific problem.
In a UK-wide context, the level of support that we provide to our SME customers in Northern Ireland means that the average margin that we earn on our business here is significantly lower than that which we earn in Great Britain. We support our customers by providing flexibility on pricing and availability.
Banks can do more to help small businesses with their cash flow. Cash-flow problems are the greatest difficulty that small businesses currently face and the reason why they are going to the wall. Banks offer help to individual customers, but, collectively, they can do more for small businesses.
I welcome you to the Committee. This evidence session is of value. I apologise in advance for some rather critical comments that I will make.
I am sure that I do not need to remind you of the super-complaint that the Consumer Council lodged against the banks over excess and unexplained charges. That complaint was upheld by the Competition Commission, which then put in place significant remedies. That case significantly diminished the banks’ credibility with the public, and you will have to work to regain that credibility, particularly during this difficult time.
For many years, people have had a great need for money advice and debt advice. At present, that need is even greater. The community and voluntary sector largely delivers that advice. What contribution to financial support do you provide to that sector? Given current circumstances, what have you done to enhance that support? The need for banks to provide that support is emphasised by the fact that the Government now strongly support them, either by their putting in money or by their providing guarantees, without which banks could not continue do business.
We absolutely recognise the importance of good money advice and, equally, fee-free money advice. That is why we provide between £3 million and £4 million of financial support to the Money Advice Trust, which funds, for example, the National Debtline and the Business Debtline phone services.
Is that a UK-wide service?
That is correct. We are also active subscribers to the Consumer Credit Counselling Service (CCCS), which is another UK-wide fee-free money-advice agency. The revenue streams for that are slightly different. In that particular instance, the CCCS finances its operation by retaining 10% of the money that it recovers on behalf of lenders. Again, I do not have the specific figure for that, but it amounts to millions of pounds. The industry has made a substantial commitment to support the Money Advice Trust.
We also looked at ways in which to make that difficult, delicate and sensitive conversation as acceptable, or as straightforward, as possible through the creation of the common financial statement, which sets clear parameters of expected expenditure, given the demographic of a household with kids, without kids, and so on, so that the individual in financial difficulty, when using this form with a money adviser, will know that, having provided the figures, any criticisms of their expenditure patterns will not be made by creditors, who will accept the income and expenditure pattern that is put to them.
A whole range of remedies is available, from the informal debt-management plan to individual voluntary arrangements, where there are core protections through, ultimately, to bankruptcy. All the banks will try actively to support their customer-base through their collections and recoveries departments.
I am asking about the support that you give to the independent sector.
I have already identified that to the tune of several million pounds each year. We also have ongoing conversations with the chief executive and the chairman of the Money Advice Trust and the CCCS in order to ensure that we provide appropriate support. We play our part in that area.
Have the local banks anything to add?
You are spot on. The need of banking is about advice — particularly in personal banking where we meet less sophisticated customers than business customers, who have professional advisers. We have had discussions with the CCCS and Citizens Advice. Our recoveries and collections people are based in Belfast, and we have talked to them about some of their issues so that we can handle situations sensitively. We must adapt to the new times.
I find that response totally inadequate and unsatisfactory. The sums talked about range from £3 million to £4 million, with those figures replicated under more than one head. That is a trifling sum when set against British, or UK, consumer needs. There is a real need for the banks to engage seriously on that issue, and they could do so. What would be relatively small sums to the banks would be significant money to the independent money-advice sector in Northern Ireland. There is a job to be done there that you could reflect seriously on, and I ask you to do so.
It is important to make it clear that the request for funding emanates from the Money Advice Trust. It will request funding that fits with its business model. We support its business model. I provided the figures to give you an illustration of the quantum that is provided. If the Money Advice Trust wanted more, it is its prerogative to call for more. If it wanted to restructure its business model in some way, it is its prerogative to do so. It meets as a board on Monday, along with representatives from the industry. To date, my conversations with the chief executive and the chairman have given no indication that there is a lack of funding for its operation.
The Consumer Credit Counselling Service gets a proportion of debt recovered, which it has priced to cover its operational requirements. Again, it has frequent meetings to confirm that it is receiving the requisite level of support. That is not just for today; it is also a forward plan.
I do not want the Committee to be left feeling that the banks have provided a sum of money and no more. We work in partnership with those organisations to ensure that we give them the right level of funding. With respect, they would say that we provide them with the level of support that they need.
I am struck by the fact that all six witnesses are male, and most of the advisers with them are also male. I see many women working in banks. Is it not possible for women to get to senior levels?
My chief executive and deputy chief executive are female. I would have to go back 10 years to find a time when my line manager was male. I can assure the Committee that women are represented in the senior ranks of banks.
That is a remarkable coincidence, then.
Mr Paisley Jnr:
I have a specific question. In an unfortunate set of events, there was a run on one lending institution in Northern Ireland — the Presbyterian Mutual Society. The allegation — it is nothing more than that — made to me is that some of the banks that had clients with accounts at the Presbyterian Mutual Society as well advised those clients to withdraw their money from the Presbyterian Mutual Society and put it into the banking sector, thus precipitating that run on funds. Is there any evidence to support that allegation? Is there any truth in it? Was there any strategy to do that?
I have no knowledge of that. It is the first time that I have heard the allegation. The first time that I heard of the society’s problems was when I read it in the press. Therefore, I have no knowledge of that allegation. If you have any particular evidence, Mr Paisley Jnr, that points to anyone in the Ulster Bank, I am happy to investigate it. That is not what we are in business to do.
Mr Paisley Jnr:
It is funny that your reply goes against the grain of everything that you have said here today. It is an allegation that I have heard, and I am sure it is an allegation that will ultimately surface if there is an investigation.
It is not something about which I have any information. However, to echo Mike’s point, if any evidence were to become available, that is something that we would regard as totally unacceptable by any of our staff members.
I thank the witnesses. It was a long session but an interesting discussion. I appreciate the repeated offers to facilitate the Committee in its further considerations as information becomes available. It is of mutual benefit to have a clear understanding of each other’s position. Today’s meeting was of some assistance in that regard.
There is media interest in the meeting; therefore, there may be press outside. The Committee has further business to conduct. As soon as that is completed, Committee members may join the witnesses in the Great Hall, or perhaps not. [Laughter.]
On behalf of the Committee, I thank you again for your answers and for giving evidence. The economic situation will continue to press down on all of us. I believe that Dr Farry said it, and I agree: accessibility to each other and discussion plays a part in reassuring the wider public that people are engaging and attempting to find ways through the current difficulties. Therefore, thank you very much.