Wholly-owned investments: frequently asked questions

Northern Rock: (Northern Rock plc, Northern Rock Asset Management plc)
Bradford & Bingley plc
UK Asset Resolution ltd: the integration of Northern Rock Asset Management plc and Bradford & Bingley plc

Northern Rock

Q. Why was Northern Rock taken into public ownership?

In late summer 2007, Northern Rock was affected by heightened turbulence in the financial markets. This threatened to undermine the bank’s ability to fund its operations. In response, the previous Government provided substantial financial support to Northern Rock. Uncertainty in the marketplace made it difficult to attract potential buyers for Northern Rock. Two detailed private sector proposals were received: one from the Virgin Consortium, and the other a Northern Rock-led restructuring plan.

Both proposals involved a degree of risk for taxpayers and very significant implicit subsidy from the Treasury. The previous Government assessed that this would not have provided value for money for the taxpayer because the private sector, rather than the taxpayer, stood to secure the majority of the future value created by the bank. As a result, having considered these proposals, the previous Government rejected them in favour of taking Northern Rock into temporary public ownership.

Q. How and why was Northern Rock restructured on 1 January 2010?

From 1 January 2010, Northern Rock was split into two separate entities:

i. Northern Rock plc: a new savings and mortgage bank authorised by the Financial Services Authority. This contains all of Northern Rock’s retail deposit base, as well as some small amount of wholesale deposits and a portion of Northern Rock’s existing mortgage book;

ii. Northern Rock Asset Management (NRAM). NRAM operates as an asset management vehicle containing the former bank’s remaining mortgages, wholesale funding, and liability for the Government loan

The rationale for the split was to minimise the amount of support required by the taxpayer. Restructuring the bank has created a revitalised operation, Northern Rock plc, which can play an active role in the mortgage market and be sold to the private sector. Meanwhile, Northern Rock Asset Management can focus on the orderly run-down of its closed book and repayment of Government funds.

Q. How much capital has the Government put into Northern Rock?

As part of the restructuring, the Government provided £1.4 billion of capital support to Northern Rock plc, and £1.6 billion is available for NRAM should the company need further capital support in the future.

In addition, the Government had by 4 January 2010 loaned Northern Rock (Asset Management) a total of £22.8 billion, plus an additional working capital loan facility of £2.5 billion to help with the orderly wind-down of the company.

Q. What is the current status of guarantee arrangements?

Following the restructuring of Northern Rock, all customer deposits have transferred to Northern Rock plc. The restructuring meant that the guarantees announced in Autumn 2007 had to be restated to apply separately to the two companies.

Subsequently, on 24 May 2010, the Treasury, in consultation with the Financial Services Authority, ended the guarantee arrangements covering variable Northern Rock retail deposits, and the specific guarantee indirectly covering retail deposits held in Northern Rock (Guernsey). All depositors were notified by Northern Rock in writing and given three months’ notice on 24 February 2010 that the guarantees were due to be removed on 24 May 2010. Fixed term accounts existing on 24 February 2010 remain guaranteed for the duration of their term.

Guarantees applying to Northern Rock's retail deposits were put in place as a temporary measure. They were never intended to be permanent and the Treasury previously committed not to lift them at less than three months’ notice.

All Northern Rock retail depositors continue to have the first £85,000 of their deposit covered by the Financial Services Compensation Scheme (FSCS). This is the same level of protection as is in place for all retail customers of banks and building societies in the UK. Savers in Guernsey and Ireland continue to be covered by similar schemes run by those jurisdictions.

The ending of guarantees on 24 May 2010 was in relation to retail deposits only, and has no effect on the status of guarantee arrangements covering wholesale liabilities of Northern Rock plc or Northern Rock (Asset Management), other than the specific wholesale guarantee covering amounts deposited to Northern Rock plc by Northern Rock (Guernsey).

Q. What is the status of wholesale guarantees?

HM Treasury gave notice on 2 August 2010 that the guarantees covering wholesale liabilities of Northern Rock plc would be lifted from 2 November 2010. This excludes fixed term wholesale deposits in existence on 1 January 2010 which are guaranteed to maturity. This announcement has no effect on the status of the guarantee arrangements in place regarding wholesale liabilities of Northern Rock (Asset Management).

Q. Will former shareholders be compensated for their shares that were transferred to Government ownership?

In taking Northern Rock into temporary public ownership, the previous Government provided that former shareholders of Northern Rock should receive compensation for their shares in line with the value that those shares would have had if the taxpayer had not stepped in to support the bank. This was set out in the Northern Rock Compensation Scheme Order 2008. The amount of any compensation was assessed by an independent valuer, Andrew Caldwell, who was appointed in September 2008.

Andrew Caldwell published a consultation document on 8 December 2009. This document set out his provisional view that there was no value in Northern Rock’s shares immediately prior to the company being taken into temporary public ownership, and therefore no compensation is payable to former shareholders. Former shareholders, like all other affected parties, then had the opportunity to feed their comments into the consultation process. On the 30th March 2010, the independent valuer published a final document (his assessment notice), summarising the key points raised during consultation and confirming his provisional view.

All shareholders were given the opportunity to ask the valuer to reconsider his assessment. On 4 October 2010, after considering the requests, Mr. Caldwell issued his Revised Assessment Notice – which stated that he remains of the conclusion that no compensation is payable by the Treasury to former shareholders of Northern Rock or to other affected parties referred to in the Compensation Scheme Order. The Revised Assessment Notice can be found on his website.

A number of former shareholders referred the case to the Upper Tribunal, where a hearing took place in May 2011. On 6 October 2011, the Upper Tribunal announced that it had upheld the Mr Caldwell’s decision. The full text of the Upper Tribunal’s decision can be found on the Tribunal Judicary website (Extrnal, opens in a new window).

Subsequently, former shareholders applied to the Upper Tribunal for permission to appeal to the Court of Appeals. The Upper Tribunal granted permission to appeal on 28 October 2011. As yet, a date has not been set for the hearing at the Court of Appeals.

Q. What is the Government doing about excessive bonuses being paid to Northern Rock executives?

On 1 January 2010, the Financial Services Authority’s (FSA) Remuneration Code came into force. Banks, including Northern Rock, have to comply with the new rules, which ensure that pay structures do not incentivise excessive risk taking, reflect long-term performance, and are subject to claw back. A revised Remuneration Code then came into effect on 1 January 2011.

Northern Rock’s failure occurred in 2007 and no bonus payments were made for 2007 performance. Executives and senior management received no cash bonus for 2008, and received no pay increase in 2009.

To assist Northern Rock in retaining senior individuals who are important to the company's future, and to motivate staff at lower levels, Northern Rock (Asset Management) announced a bonus scheme totalling £14.9 million in its 2009 Annual Report. This bonus scheme was agreed with UK Financial Investments, and has been agreed with the FSA. It complies with FSA rules and is in line with agreements made by the G20.

The vast majority of payments are small bonuses to frontline workers, mainly based in Newcastle and Sunderland, on an average salary of around £20,000. Bonuses for staff earning a salary of more than £39,000 are subject to clawback and deferral. Gary Hoffman, former CEO, agreed to waive his bonus entitlement in respect of 2009 and will not receive a bonus payment for 2010.

Further information regarding remuneration in 2011 will be published in Northern Rock’s Annual Report 2011.

Bradford & Bingley

Q. Why did the Government intervene in Bradford & Bingley?

Following turbulence in global financial markets in the summer of 2008, Bradford & Bingley (B&B) found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution.

On Saturday 27 September 2008, the Financial Services Authority (FSA) determined that Bradford & Bingley no longer met its threshold conditions for operating as a deposit taker and, on Monday 29 September 2008, the Treasury exercised its powers under the Banking (Special Provisions) Act 2008 to transfer Bradford & Bingley into public ownership. Immediately after this transfer, the retail deposit book and branch network were transferred to Abbey National plc (now Santander) following a competitive process.

Q. Does the taxpayer have any outstanding interest in Bradford & Bingley?

There were some remaining assets and liabilities of Bradford & Bingley that were taken into public ownership at the time of sale to Abbey National (now Santander). These consist mainly of some of Bradford & Bingley’s mortgage book, personal loan book, headquarters and relevant staff, treasury assets and wholesale liabilities. The intention is for the Treasury and the Financial Services Compensation Scheme to recover payments through a managed wind-down of this portion of Bradford & Bingley.

Q. Where can I obtain further details about the difficulties faced by Bradford & Bingley in the financial crisis?

The Treasury Select Committee has taken evidence from Rod Kent and Richard Pym of Bradford & Bingley on the difficulties the firm faced and the events leading up to the FSA’s determination. A transcript of their evidence, from 18 November 2008, is available to read on the Parliament website (opens in new browser window).

Q. Why has Bradford & Bingley stopped paying interest to its subordinated bondholders?

Article 6 of the Bradford & Bingley plc Transfer of Securities and Property etc Order 2008 (as amended) specifies that principal and interest on dated subordinated notes shall not become due and payable until such time as Bradford & Bingley has satisfied its £18.4bn liability to the Financial Services Compensation Scheme (FSCS). In short, the firm needs to repay its £18.4bn debt to the FSCS before it is able to pay out to subordinated debt holders.

Responsibility for decisions regarding coupon payments on other subordinated debt rests with the Bradford & Bingley board, which must take account of its duties to the company and other relevant circumstances, including the objectives of the business plan and the fact that Bradford & Bingley is in ‘wind down’ (i.e. closed to new business). Bradford & Bingley announced on 23 February 2010 that it will defer payment of principal and interest on its subordinated bonds until the £18.4 billion statutory debt owed to the Financial Services Compensation Scheme (FSCS) and the Treasury is repaid. The FSCS and Treasury provided £18.4 billion funding to transfer Bradford & Bingley’s retail deposits to Abbey on 29 September 2008. The deferral of the payments of these bonds is part of the condition for which European State Aid approval was granted on 25 January 2010. Please see Bradford & Bingley plc’s website for announcements about payments relating to specific bonds.

Q: Does the Government rank above Bradford & Bingley’s subordinated bondholders as a creditor?

The ranking of subordinated debt holders in Bradford & Bingley reflects the normal creditor hierarchy. The Treasury and the FSCS provided approximately £18.4 billion of funding to enable all retail deposits held in Bradford & Bingley to be transferred to Abbey National plc. The Treasury and the FSCS then assumed the place of the depositors in the wind-down of Bradford & Bingley. So, in accordance with normal insolvency priorities, the rights of the Treasury and the FSCS rank above subordinated creditors in the same way that the rights of retail depositors would have been senior to subordinated creditors.

The Treasury also has a claim on the proceeds of the wind-down as Bradford & Bingley’s sole shareholder. This claim ranks below the claim of subordinated creditors, in the same way that it is usual for equity to rank below subordinated debt.

Q: Will Bradford & Bingley’s shareholders be compensated?

On 18 December 2008, the Bradford & Bingley Compensation Scheme Order 2008 was made, which sets out the details of the compensation scheme for determining the amount of any compensation payable to investors who held Bradford & Bingley shares immediately before they were transferred into public ownership.

The scheme provided for the Treasury to appoint an independent valuer who may set his own procedures for conducting the assessment of any compensation payable. In conducting his valuation, the valuer is required to assume that at the time that Bradford & Bingley was taken into public ownership, public financial support had been withdrawn and no further financial assistance from the Bank of England or the Treasury would have been provided (other than ordinary market assistance).

Following a competitive process, the Treasury announced on 24 June 2009 that it had appointed Peter Clokey of PricewaterhouseCoopers LLP, as independent valuer for the Bradford & Bingley plc compensation scheme. The valuer is independent of the Treasury and is responsible for his own process.
The valuer published on 5 July 2010 his final assessment on the compensation payable to former shareholders and other parties specified in the Compensation Scheme Order. This independent report concluded that no compensation is payable.

All affected parties, including shareholders and bondholders, were given the opportunity to submit a request for the valuer to reconsider his decision. The valuer set a deadline of Friday 27 August 2010 and considered all requests before producing his Revised Assessment Notice on 14 March 2011. Mr Clokey states in his Revised Assessment Notice that he remains of the conclusion that no compensation is payable to former shareholders of Bradford & Bingley. The Revised Assessment Notice can be found on the Bradford and Bingley website (external, opens in a new window).

Subsequently, the case was referred to the Upper Tribunal and a hearing took place on 24 November 2011. As there is no applicant actively pursuing the claim, the judge is giving shareholders until 13 January 2012 to write in say whether they wish to participate actively in the proceedings. A number of individuals have indicated that they wish for proceedings to continue. The Tribunal will inform us of the next steps in due course.

Q. Where can I find out more about the valuation of Bradford & Bingley?

Further information about the valuation process can be found on the independent valuer’s website.

UK Asset Resolution: the integration of Northern Rock (Asset Management) and Bradford & Bingley

Q. Why and how were Northern Rock Asset Management and Bradford & Bingley integrated?

Following assessment of the longer-term options for management of Northern Rock Asset Management and Bradford & Bingley, the previous Government announced in its March 2010 Budget that both companies would be integrated under a single holding company, UK Asset Resolution, regulated by the Financial Services Authority.

UK Asset Resolution was established on 1 October 2010 in a process that was managed by UK Financial Investments – the company set up to take responsibility for the management of Government holdings in the financial sector.

The companies were integrated as Northern Rock Asset Management and Bradford & Bingley are two similar businesses, comprising closed mortgage books in wind-down (meaning that neither can accept new business nor make any new loans, but instead service existing loans to the end of their term).

The Government believes that the optimal solution for these businesses is to integrate them so as to maximise value for the taxpayer and facilitate the orderly management of both companies' closed mortgage books. The integration will help establish a more efficient organisation that provides a high level of customer service and arrears management.

Q. What does this mean for me as a customer of Northern Rock Asset Management and Bradford & Bingley?

There will be no change to customers’ accounts and there are no plans to change the existing brands. There will also be no change to the existing liability structures: in other words, the balance sheets of both banks will remain intact and separate from one another.