MS ANGELA KNIGHT CBE, MR PAUL CHISNALL AND MR ALEX MERRIMAN

13 MAY 2008

  Q200  Chairman: Angela, we are not talking here about the pay of chief executives, it is the incentive structure for those who deal with the products. It is deeper than that.

  Ms Knight: Yes, I do agree with you, Chairman, and I appreciate that in my answer I did not go into that point. I do appreciate what you are saying, but I come back to the fact that these whole pay structures, as you know, they operate here and they operate elsewhere. As do the incentivisations. They have been highlighted by a couple of the international fora, of which the IFF is the one that we are more closely linked with than others and is about to publish some rather more detailed proposals underneath their earlier set of principles, which, again, looks at some of these.

  Q201  Chairman: Joseph Ackerman is the Chairman?

  Ms Knight: Joseph Ackerman.

  Q202  Chairman: They did a good analysis of it but the prescription was as weak as dishwater.

  Ms Knight: Yes, but he has got another report coming out and we want to have a look at what he says. I am not going to preclude what he says until I see it, if that is all right.

  Q203  Mr Mudie: I think the point on salaries that was made that Ms Keeble raised was the business of what Jon had said earlier. It was not so much the level, it was the way they were structured. They were structured in a way that encouraged bad behaviour. You do not find that acceptable, I presume, and that is something that can be done without.

  Ms Knight: I agree. None of us wants incentives that encourage bad behaviour or, dare I say it, too great risk-taking either. There is something about risk frameworks, there is something about how you incentivise without going over the top, all of which is part of the things that banks are addressing right now, George.

  Q204  Mr Mudie: Do you regret leaving insurance for banking?

  Ms Knight: I did not leave insurance; I left the private client stock broking community. It was a lot quieter.

  Q205  Mr Mudie: You did not regret leaving insurance but you regret leaving the stock brokers.

  Ms Knight: I see what you mean, when I was involved with Scottish Widows. It all did seem a lot quieter than April Fools Day 2007 when I joined the British Bankers Association. There are many things to do on April Fools Day; that is certainly one of them.

  Q206  Mr Mudie: Maybe you would have left a better class of people, Angela, but you cannot comment.

  Ms Knight: I find all jobs that I have ever done interesting. Some can be slightly more challenging than others.

  Q207  Mr Mudie: Of course, you were at the Treasury at about the time Lamont was there, so you have led an interesting life.

  Ms Knight: No, I was not, I was there with Ken Clarke.

  Q208  Mr Mudie: Every time we see the Governor he lectures us on moral hazard. The last time he came I queried why he bailed the banks out with £50-100 billion without getting any assurances from them that they would cut dividends, do something about raising capital and try, above all, as we are trying, to get the banks through this troubled period, trying to get their borrowers through this troubled period, especially people with mortgages.

  Ms Knight: Yes.

  Q209  Mr Mudie: Do you think it encourages moral hazard to give this £50 billion facility without asking for those assurances?

  Ms Knight: You know I am going to say something first, and that is that the £50 billion is not a bail-out, it is liquidity that is there in the market. It starts to match what is happening in other markets, banks pay for it and at some point no doubt that additional money that they have paid for, the cost of that money, will result in an additional dividend to the Treasury. Having said that, let us come to the point.

  Q210  Mr Mudie: I understand that, but if you are looking for a loan and you are in deep, deep trouble and you get a wonderful facility of £50 billion without any other financial conditions, then I think you have got away with it.

  Ms Knight: I think that what the banks are doing is nothing to do with getting away with something. It is all about continuing to be able to provide, as you say, mortgages to their customers. One of the problems right now is that there are a very considerable number of other lenders who either have exited the mortgage market or who are nothing like the same participators as they were. When the figures are published we will see a significant increase in the percentage of the mortgage market taken by the banking industry, I am sure, and that is because they are fulfilling, if you like, the commitment to their existing customers and to the customers of others who are no longer prepared to provide that facility.

  Q211  Mr Mudie: That is really interesting, Angela, because that flies in the face of what the Governor told us. Mervyn said, "I am in no way wanting to encourage you into the housing market." In fact we were critical, I was certainly critical, of the fact that he had not included all the building societies in the facility.

  Ms Knight: I think I am right in saying there are about ten there, but I am not entirely sure. There are a number of building societies there. What the £50 billion is doing, if you like is it is allowing the banks to continue to do the business that they are doing in a way that is beneficial to their customer base. If you do not want them to keep on lending for mortgages, then say so, but my understanding is that at the same time we are being told that we must continue to provide mortgages. Liquidity, if it is available from the Bank of England, is providing, if you like, an alternative to the securitisation route, which is closed, and they are depositing, therefore, some of the high quality assets in return for liquidity which otherwise would have been sold out into the market. The key is right back at the question which Graham Brady asked, which was: what can we do about the securitisation market? Let us hope the securitisation market does start to open, because that will solve an awful lot of issues.

  Q212  Mr Mudie: Okay, but that was the behaviour towards the lenders. I disagree with you in terms that you do not expect them to—. I can see a case for not extending new mortgages, but when existing mortgages are two-year mortgages—there is a couple of billion of those—I think it would have been reasonable to ask the industry to ensure that people are kept in their home for at least another two years whilst we get through this period, but they did not do it, and you did not volunteer it, I see.

  Ms Knight: I was not part of those discussions.

  Q213  Mr Mudie: No, but you are representing the industry.

  Ms Knight: So I can tell you what is happening, which is perhaps more important. Perhaps two things. Firstly, re-mortgaging is taking place of existing customers. Re-mortgaging is also taking place of customers of other lenders who, for various reasons, are not providing that re-mortgage; so the banks are picking up part of that system of which the unwinding of the Northern Rock book is clearly a significant factor.

  Q214  Mr Mudie: Angela, are you sure?

  Ms Knight: Yes.

  Q215  Mr Mudie: Because one of the banks, I think it was the Halifax, came into the market and was greeted with amazement and I think very quickly closed their doors because everybody was shoving their business towards them. Are you sure, if I went into a High Street bank now, that facility would be available?

  Ms Knight: I am afraid I do not know your personal circumstances, so I cannot answer the question in that respect, but if you are asking are the facilities generally available, the answer is, yes. Equally, the point that you have just made, that if there is a particularly attractive offer coming up does everybody pour into that offer, the answer to that is, yes. I had a look on some of the comparison websites before I came out today to see what was available in the way of mortgages and the percentages and proportions that are being offered. There is still a selection out there. I say again, it is predominantly from the banks, and they are doing their part in the re-mortgaging process. The figures will be available in due course. There is a bit that one can see out of the figures we published about three weeks ago. Those ones showed you some of the re-mortgage peaks. I appreciate that all the commentary was about the low level of new mortgages, but if you look at that particular press release, which is compiled from the statistics of the major banking groups, you see a very big peak on the re-mortgaging. That is earlier this year, but that does put some underpinning to what I am saying.

  Q216  Mr Mudie: I hear what you say, but the figures in terms of repossessions or implied repossessions—and there is a difference—are shooting up.

  Ms Knight: Yes.

  Q217  Mr Mudie: Unemployment is not rising, and in fact the library note (and you will understand what I mean) highlighted a couple who were both in work, so there could only be one thing (and this one was the Northern Rock market), that the banks are setting a rate that is causing financial problems to good people who are in work, who are buying their house, raising their families and are being forced out because you do not want their business.

  Ms Knight: What we are doing in that particular area—and I will have to look at my note, I am afraid—is we have got both a Banking Code set of requirements and requirements in MCOB—that is the mortgage regulation. Clearly I will send you the detail you wish, but it is about dealing fairly with customers in arrears, it is about using reasonable efforts to reach agreements, it is about repossessing only where all else has failed. Clearly, I do not know the specific conditions of the example that you have given, but what I do know is that our members are signed up to a set of policable and enforceable criteria. It is not in their interests to repossess either; it is in the interests of all to find as good a way through as possible.

  Q218  Mr Mudie: I hear what you say, Angela, but they are repossessing at greater numbers and it is going up alarmingly. What I do not see here is either the authorities or the industry actually operating with the same objectives as are being adhered to in the States, where there is a political will from everybody concerned to keep people in their homes wherever possible. You will never stop every repossession, but it is interesting and alarming that people who are in work are being repossessed. Somebody losing their job can get into trouble and you could understand that they cannot make their payments. So, I suggest they are being forced out, and one of the factors is the rates that are being charged to dissuade them from extending that mortgage.

  Ms Knight: Your point is well made. As far as the industry is concerned, repossession is a last resort, not a first. It is the place they do not want to go to and the criteria, which are signed up of our own making, as well as the regulation, we hope, will ameliorate very considerably the difficulties that may well result as a consequence of poor economic—

  Q219  Mr Mudie: I am certainly not getting it from the Bank of England, but I would have welcomed some body being set up to police this and make sure it was happening, because ordinary people are being hurt and they are being hurt because of the behaviour of the banks in the first instance and now they are being hurt by the banks rescuing themselves by divesting them of their business.

  Ms Knight: Let me take that away, give it some consideration and come back to you.