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We have three witnesses on our first panel this morning and I welcome them to the committee. They are Rod Ashley, chief executive of the Airdrie Savings Bank, Wendy Dunsmore, regional officer of Unite the union, and Professor Charles Munn. They are here to discuss the decision of the Airdrie Savings Bank to close.
First, I invite members of the committee to state any interests that they have in the matter of the Airdrie Savings Bank.
I declare that I bank with the Airdrie Savings Bank and virtually all of my money is with it.
We will proceed by committee members putting questions to the witnesses. If witnesses wish to come in on any question, they should simply indicate that by raising a hand. There is no need to work the microphones; that is dealt with by the sound desk. I ask committee members and witnesses to keep questions and answers succinct and I ask witnesses to bear in mind that they do not have to answer every question.
To start off, I have a question for Rod Ashley about the background of the decision to close the Airdrie Savings Bank. I am interested in the procedure that was followed in coming to that decision. Members of the public may not understand how it works, so it might be helpful to start with some explanation of that.
Are you familiar with the corporate structure of the bank?
I am happy for you to give a quick summary of that.
The bank is a savings bank under the Savings Bank (Scotland) Act 1819. It has trustees, so it is not a normal corporate structure as we would expect in 21st century governance—it is a mutual. I consider that it is part of the social enterprise sector. Having said that, the bank operates with that kind of normal corporate governance structure in place, with a board, subcommittees and other governance elements as required under the various acts and banking regulations that we have.
On the background of the decision to close the bank, as a normal board we are always looking strategically at what the options are in relation to our banking structure. We undertook a strategic review of the options for the bank. That led us to conclude that the bank’s medium to long-term position was sufficiently uncertain that, in order to act in the best interests of the depositors, we should take the decision to close at this point in time, which would enable us to conduct an orderly wind-down of the bank affairs so that there might be a community benefit at the end of the wind-down process.
Can you expand on the phrase, “in the best interests of the depositors”?
Under the 1819 act, the obligation of the trustees in relation to governance is to act in the best interests of the depositors. We could have ended up with the bank continuing to make losses for a number of years to come, and there would have come a point at which the control of any wind-down would have been taken out of the hands of the local community and the trustees and handled by the regulators. The bank did not wish that to happen—it wished to retain control of what was happening, the destiny of the bank and, therefore, the best interests of the depositors.
You said, “continued to make losses”. Was the bank making losses at that stage?
Yes.
The decision was taken by the board of trustees—is that correct?
That is correct.
Did the board of trustees have to run that decision by anyone? Is the board accountable to anyone in particular?
The board of trustees, internally, is not accountable to anyone, but a modern bank runs hand in hand with the regulators. Both the Prudential Regulation Authority and the Financial Conduct Authority were aware of what the board decision was going to be—they knew that it was going in that direction.
Does Professor Munn have any comment on that?
One point to note is that the trustees are not remunerated. I believe that that is still the case—
It is.
They are volunteers.
I should explain that I wrote the history of the Airdrie Savings Bank to celebrate its 175th anniversary seven years ago. As you know, the bank has a long tradition, as well as a history of dealing with regulators. That has not always been a happy experience, largely because for the past 40 years or so, the Airdrie Savings Bank has been unique, so it has been quite awkward for the regulators in London—whether that is the Bank of England or the Financial Services Authority—to understand what they are dealing with.
The book tells the story and I will not elaborate; I will simply say that there have been quite challenging times. For example, at one point, regulators in London asked the Airdrie Savings Bank for a full detailed statement on its international exposures. [Laughter.] Apart from selling the occasional travellers cheque, the bank did not have any international exposures.
What is the full title of your book, for those who may be interested?
It is simply called, “Airdrie Savings Bank: A History”, and it is available from the bank.
I can confirm that we still have copies available.
Thank you. I will bring in Wendy Dunsmore when we come to questions that are relevant to her remit, but first Richard Leonard has some questions.
Professor Munn alluded to the long view. Some people would ask why, if the bank can survive two world wars and the great crash of 1929, it finds itself facing closure at this point in its history.
It has not always been an easy run. Some people I have spoken to have the notion that running the Airdrie Savings Bank—especially after all the nice things that were said about it at the time of the crisis—has always been an easy ride, but it has not. There have been many challenges for the bank. In the 1970s, for example, it faced a challenge that was opposite to the one that it is facing now, because inflation and interest rates were very high. The situation now is the exact opposite. As I say in the book and as Rod Ashley has said, the margin between lending and borrowing rates is now so narrow that it is difficult for the bank to make enough of a surplus to pay its way.
I understand that the era of low interest rates is penalising not only savers but presumably the Airdrie Savings Bank’s business model. Mr Ashley, could you explain a little more about what happens when Mr Mason deposits his money in the bank? What do you do with that money and where does it go?
The Airdrie Savings Bank is entirely retail deposit funded—that is, our customers raise all the deposits and funds that we use.
The traditional model of a savings bank is that it would not lend any money to customers at all. Charles Munn will no doubt be able to correct me on the dates, but it was only around the mid-1980s that the bank started to lend money to any customers. In fact, Queen’s counsel opinion had to be obtained to ascertain whether that was possible.
By the time I joined the bank, in 2013, we were in a position where, of the deposits that we had, about a third were lent to customers. That is in contrast to many high street banks, where the percentage that is lent out is closer to 75 or 80 per cent. About a third of our deposits were lent to other banks in the form of deposits with those banks. Traditionally and historically, those banks had acted fraternally towards the Airdrie Savings Bank and had perhaps given us a slightly higher rate than we might have got elsewhere. However, that does not happen any more. The final third of deposits were invested in Government bonds and gilts. In general, that was low-risk use of the funds in accordance with the bank’s practice.
Since 2008 or 2009, two of those thirds have been yielding very little and the other third—the lending to the customers—has been under pressure from the low interest rate environment and the low inflationary position. Consequently, it is very difficult for us as a savings bank to make any money at that return. As Mr Mason will concur, it is certainly very difficult to give any return whatsoever to depositors in that environment.
Was any consideration given to investing Mr Mason’s and other depositors’ money elsewhere, as a pension fund might do? Is it possible within the terms that frame the operation of the bank—whether that is the 1819 act or subsequent legislation—to consider other forms of investment vehicles in order to try to increase the yield, instead of simply putting the deposits in another bank?
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The range of investments that the bank is able to go with, certainly within its policies, is narrow. It obviously also depends on risk appetite, and the bank has first and foremost always been very prudent with investment vehicles. As I have said, the trustees’ overarching duty of care is to act in the best interests of depositors. The risk profile that we were prepared to look at would have been low, in keeping with what you would expect the organisation to consider.
I think that Gordon MacDonald wanted to come in on that point.
Is the loss making due purely to the narrow margin that you have referred to, or have any additional costs been placed on the bank since the crash of 2008?
It is a combination of two factors. Because of its operating model, the bank has traditionally had a very high cost-to-income ratio compared with peers or other banks. Since 2008, we have embarked on a number of cost-cutting and income-increasing measures that our customers have worked with us on implementing. Some of the measures have been quite unpalatable, but the customer base has been loyal.
There is no question but that we have had additional costs to bear since 2008 as banking throughout Europe—indeed, throughout the world—has been reformed, and that there has been a bigger regulatory compliance burden that there might have been previously. There is no real indication of that situation reaching a plateau; indeed, it changes frequently.
Let me give you a short example. Eighteen months ago, the financial services compensation scheme limit changed to £75,000, but it has just changed back to £85,000, which is what it was previously. Such a factor is completely outwith our bank’s control—and, as I understand it, outwith the UK’s control—but implementing such a change, notifying customers of it and subsequently putting the limit back to where it was has been quite an onerous project for a bank of our size.
Presumably you had built up reserves in previous years to allow you to make up for the odd year in which you made a loss. For how many years have you been running at a loss, and how much of a reserve did you have to compensate for that loss over a number of years?
You are correct about the bank’s reserves. The only way in which the bank can build up reserves is through retained profits, and over the years in which the bank has been in existence, any profits over and above the deposits that have been returned to customers have been invested in those reserves. It is exactly for the reason that you give that the board built up the reserves that it has been using over the past number of years; it felt that utilising those reserves was the way to support investment back into the community. However, the reserves had been decreasing and were forecast to continue to decrease; as I mentioned earlier, the board did not want to get to a position in which the capital requirements were not being met, because it would have lost control at that point. I believe, therefore, that the short answer is yes.
Professor Munn, do you want to come in on any of these questions? I will then move to questions from Bill Bowman and Gillian Martin.
I want to make just a small point. Following on from what Rod Ashley has just said, I think that the other element is the need for future investment in the bank’s fabric and technology. That, too, can come only from accumulated reserves, and if reserves are not actually accumulating, it makes it increasingly difficult to keep the bank’s fabric and technology up to date.
Mr Ashley, I think that you said earlier that it was the trustees who took the decision to wind the bank down. Is that correct?
Yes. I can clarify that a little bit, if you like.
What is the background of the trustees? Are they experienced in the financial sector? What external advice did they take in making that decision?
I will clarify. The trustees, ultimately, are the decision-taking body. Because of changes to banking regulation and the fact that we come under an old act, the decision-making body in the bank is now defined as a board, which includes individuals who are also covered by the FCA and PRA senior managers regime. In addition to the trustee members, the chairman of the board, who is an independent non-executive director, the chief executive officer—who is me—and the chief financial officer sit as the board. On that basis, the three of us are considered to be part of the wider board and the decision-making process.
We conducted an extensive strategic review over 12 months. We were supported in various phases of that with views from outside consultancy agencies on what we were looking for before we arrived at the conclusion that we reached.
What outside consultancy agencies did you rely on?
We worked quite closely with the big four accountancy firms. The bank’s audit firm is Deloitte, but we also have relationships with the other accountancy consultancies.
Did you take advice from banking experts of any sort apart from the accountants to which you refer?
The answer to that is yes because, through me and other members, the bank is involved in various forums and groups to which we took discussion about a number of the strategic options that we were considering. We have also discussed the position with the Scottish Government, which has been sighted on what we have been doing for the past couple of years, so we have had meetings with it in Edinburgh.
I will jump back to Mr Bowman’s question—I just remembered that I did not fully answer the second part of it, which was about the skills and qualifications of the other board members. There are a number of bankers on the board. Traditionally, the local townspeople would have been the trustees but, increasingly, we have people with a banking background sitting on the board of trustees. For example, we have a couple of lawyers and accountants with banking knowledge. We have a chief risk officer as well. Therefore, there is now quite a strong level of banking and financial services awareness on the board and among the trustees.
I cannot have been alone in feeling disappointed when I heard the news that the bank was going to close. Many people in Scotland who looked to the Airdrie Savings Bank as an alternative to mainstream banking will have shared my thoughts on that.
I will pick up on something that Professor Munn said about modernisation. What impact did the inability to modernise to the extent of introducing internet banking and providing a more cashless service have on your decision? What did you do to get assistance in modernising from agencies such as Scottish Enterprise, the Scottish Government and your local authority? Why did that not come to fruition—or did it?
The bank’s traditional offering has been and remains branch based. In around 2010, it implemented an internet banking offering. That was particularly useful for the business banking customers, who were looking for it. Since 2010, everything has moved on: the digital age has arrived with even more force and our offering is behind that curve. The investigations that were done into the investment levels that would be required to move us forward with that showed that they would be outwith the bank’s capabilities, given its retained reserves.
In terms of the discussions that we have had, we are an account managed firm with Scottish Enterprise, with which we worked closely—we had a number of introductory contacts following our meetings here at Holyrood. One of the strategic areas that we looked into was diversification of product offering, to try to spread the bank’s products. Scottish Enterprise was able to offer us some support on that in terms of capacity, through a contribution towards specific project employment costs in order to get two specific projects that we undertook with it under way.
I know that people turned to the Airdrie Savings Bank when they lost faith in the commercial banking sector—for example, around the crash—and that after the Scottish independence referendum you again had a surge in people wanting to bank with you. Did you feel that you were limiting the number of people who could come to you because you were unable to modernise? Was that a factor? Were you unable to grow, or did you not particularly want to grow?
I did not get a sense that anyone who wanted to join us was unable to. For some of the customers who were coming to us, there was potentially a slight mismatch between their expectations of what banking services might exist and the reality of the situation: at the time, we had eight branches, which we then decreased to three; we did not have mobile banking apps; and our current account service cost £5 a month, unlike a number of other banks. However, anyone who wanted to join us—certainly, anyone who spoke to me about coming to join us—for such reasons was welcomed in and able to open accounts with us.
Okay. Thank you.
I am curious to know the extent of your contact with the Scottish Government. Who did you meet, what was discussed, and what was your ask of them?
It is nice to see you again, Jackie. I do not have my notes of the meeting with me, but we met Mr Swinney, while the matter was within his brief. Our local MSP is Alex Neil, and Richard Leonard is also one of our local MSPs. We had two or three committee meetings at which they were able to push us in the direction of a number of contacts, which I then followed up through various meetings through Scottish Enterprise. The Scottish Investment Bank and the UK Green Investment Bank were the kinds of contact that we were put in touch with, principally to see whether there were other areas that we could lend into.
Did that achieve any outcome?
I would say that it was moderately successful. One of the challenges that we came up against was that, for a lot of the small and medium-sized enterprise lending, we are really very small. Our maximum lend was potentially smaller than a number of projects that we were looking at in that area. We were being taken into areas that were very interesting and important, but not ones in which we had a particular skill set.
We were looking at developing and at who we might work with. We launched a social enterprises project and established a relationship with the Scottish Community Re:Investment Trust, which is supported through the Scottish Government. We were trying to make Airdrie Savings Bank at least one of the main banks that social enterprise would think of when looking at banking facilities.
How much increased lending did that result in?
It resulted in some increased lending, but, as you know, the wheels turn more slowly in that kind of sector, as everybody gets together and decides what is going to happen, and a lot of projects do not come to fruition. We did quite a lot of work, we were moving in the area and we did some additional lending, but it was not going to be a bank-changing amount of lending.
Okay. That is helpful to know.
I move on to staff and to questions for Wendy Dunsmore. The bank has, I think, 70 members of staff, and the partnership action for continuing employment team has been in. I am keen to know how easy it is going to be to relocate people who have very particular skills, given that job numbers in the banking sector overall appear to be contracting.
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Airdrie Savings Bank staff would be an absolute catch for any other bank. I say that because I have worked in the finance sector as a Unite officer, and the Airdrie Savings Bank’s commitment to staff training is exceptional when compared with that of any other bank. The proportion of people who have banking degrees or are chartered accountants is far higher than in any other bank. If I were TSB or Lloyds I would be hanging about Airdrie Savings Bank to snap those people up because of their incredible talent. The staff have the banking qualifications that other banks do not even explore.
How many people is the bank losing just now?
I can support what Wendy Dunsmore has said. A handful of our staff have been successful recently in obtaining other jobs in financial services. However, we have begun the first consultation—28 April is the key date for that.
The bank is doing a properly structured wind down, which is far better than the position in 2009, when everyone was chasing their tails trying to deal with 40,000 job losses because of mismanagement. That is the shame of the big banks. Airdrie Savings Bank has become a bit of victim of its own success because it was not touched in 2009—there was not the same impact as there was with HBOS, Lloyds, the Royal Bank of Scotland or any of the others. However, now there is an impact on its talented workforce. That is the tragedy—it is not just that it is the last trustee bank in the United Kingdom, but that there will be such an impact on the workforce.
We are now going through a consultation process and some staff will be made redundant in the second half of the second quarter of the year. However, it is being done in a very organised way. In addition, Airdrie Savings Bank is properly committed to good industrial relations. If you look at what happened in 2000 onwards, and probably before then, other banks did away with paying staff for their skills and instead paid staff for what they could sell—and miss-sell. Airdrie Savings Bank never went down that road and instead rewarded staff every year for the skills that they learned—they were never targeted on sales.
Airdrie Savings Bank carried on the proper banking stuff from the 1970s and 1980s, when all the banks were really successful and steady, and it never lost its ethos. It is now a victim because of that, yet the other banks are still able to meet customers’ needs by selling—however you want to wrap that up. Airdrie Savings Bank does not have the products and has never forced itself on its customers. If I go to the Bank of Scotland, it will not make any money on my deposits, but it will make money on my insurance, my credit card and all the rest of it. Airdrie Savings Bank could not offer that suite of products in order to make money out of me. It can only offer the basic service, which does not make any money. That is where the impact has been.
I am happy to continue, convener, if there is time.
You may ask another brief question. I should tell the witnesses that the committee would welcome further information in writing. If you feel that you have not had an opportunity to clarify your answers as you might like, you may come back on a question in writing to add to or clarify what you have said. Please bear that in mind.
Jackie Baillie has a short question and then we will come to John Mason, who has already been mentioned.
I want to ask about the bank’s customers. Wendy Dunsmore touched on the point that the expectation of customers was that they would get services that were different from those offered by the other high street banks but vastly better than those offered by credit unions. Was any consideration given to going back to more of a credit union model, for which there is a lighter touch in terms of regulation?
That was one of the strategic options that we considered. Aspirationally, it was appealing in a number of ways, although it would have proved quite complicated to carry out. In effect, it would be easier to set up a new credit union with elements of the bank than it would be to carry out a conversion process. Working with the local credit unions might well be something that happens in the course of the wind-down. We are very open to that.
Do the local credit unions bank with you, or do they bank elsewhere?
A number of my colleagues in other banks have made active plays to attract business from the credit unions. We enjoy good relations with several of the local credit unions.
May I just add a thought on Jackie Baillie’s first question about skills and employability?
Certainly.
For many years I was chief executive of the Institute of Bankers in Scotland. In the 1990s, when banks started deciding that they no longer wanted to employ bankers but wanted to employ salespeople, a lot of the traditional bankers we have been talking about left the service. My colleagues and I were able to help quite a number of people to find employment. We were pleased and surprised to discover that their skills were transferable not just into other financial services companies but into a wide range of enterprises and public service. I am sure that that is still the case.
That is good to hear.
We have covered quite a lot of ground, including the impact of regulation and modernisation, which Gillian Martin talked about. It seems to me that there are two issues. I should say that I am one of the people who deliberately moved to Airdrie Savings Bank because I was fed up with the bigger banks, and I am incredibly disappointed that you are not going to be there any more. However, that is the way it is going.
Even if we had not had all the other banking problems and all the extra regulation, was it almost inevitable that the modernisation process—I do not have a contactless card, for example—was going to squeeze you anyway, whatever happened?
Contactless payment is a good example of an additional burden that one would not necessarily call a regulatory burden. We are a member of Visa, and pushing contactless cards has been quite a strong agenda item for Visa over the past couple of years—not much longer than that. Visa has basically mandated that all its members have to make their cards contactless by a particular date. Making the cards contactless would have been another quite major project that we, as a card issuer, would have had to deal with. Beyond that, contactless payment brings in an additional level of risk—cyber-crime and fraud risk—which we are not exposed to at the moment because we just have a chip and PIN card process. There is no question but that, as the cost base shifted and needed to be redressed, even if we had not gone through that to the extent that we have, fundamental changes in strategy would still have been required in the bank.
I am an accountant by background, not a banker, so I do not know all the details of banking, but if you were to introduce something like the contactless payments, is there a lump sum that you would have to pay as a one-off cost for new equipment and things and also an extra cost per card? How does that all work out?
Every time a customer uses their card for anything, be it to take money out of an ATM or to buy something using contactless or chip and PIN payment, the bank gets charged for that. There has to be a way of recouping those funds. We would have to set up an internal project, probably involve external information technology, require testing by a third party and pay Visa to set up a project team in order to run it, and then purchase a whole new stock of cards for all the customers before sending them out to them. That is quite a major project.
Leaving aside regulation, you are a small player in the banking system and you are struggling to compete and work with all that. It has been suggested that you could join up with another bank at some point, which would overcome some of those problems. Was that ever seriously considered?
Yes, absolutely. I might bring Charles Munn in to say a wee bit specifically on the structure, but that was a strategic objective that we looked at. For various reasons, again relating to the corporate structure, a merger or a takeover is not possible.
There are plenty of examples—historical and more recent—of small organisations going into partnership arrangements with other, sometimes larger, organisations, to share resource, develop a product or pursue a project. Indeed, when Airdrie Savings Bank first got into lending, it did so through the Bank of Scotland, in the 1970s and 1980s.
We are even beginning to see that kind of approach in the credit union movement. I think that it is the Department for Work and Pensions that has put up quite a bit of money to provide a common platform for credit unions, so that a lot of the overheads can be shared and the banking systems—the simple ledger stuff—can be operated on a common basis over a number of credit unions. That means that each credit union does not have to set up its own facility and incur all the costs. As Rod Ashley said, it is some of the start-up costs that really do the damage.
Some of the regulation is at EU level, as has been mentioned. I understand that in Germany, Spain—I happened to be in Spain last week—and other countries there are more small banks. Are such banks coping? Are they facing the same problems? I do not know whether that is outside your field.
They are facing the same sort of problems not just in Europe but in the United States. I spent a year in the States recently and I still have a joint account with my American wife in a little bank in a little town in Massachusetts, in the hills. It is wonderful, and it reminds me of Airdrie Savings Bank every time I think about it, because the parallels are so strong. However, all the other local banks around that bank have merged; it is the only survivor out of a raft of little banks that existed for a very long time in those local towns—it is real small-town America.
Similar things are happening in Europe, although it is not possible to generalise across Europe, because of its diversity. There has been a lot of merger activity of small banks, particularly for banks of the size of Airdrie Savings Bank. When I heard the news that Airdrie Savings Bank was to close, I was hugely disappointed, but I cannot say that I was entirely surprised.
Was the union surprised, or did staff accept that closure was inevitable?
There are a couple of points to make on that. Were we surprised? Of course we were, because we had been working with the bank. As Rod Ashley said, at one point the bank had nine or 10 branches, and it was doing another strategic review every year to reduce the branch network, because footfall was falling and banking was changing for everyone. We live in a reality-television world now, in which everything has to happen immediately, and Airdrie Savings Bank cannot cope with that kind of demand. We had gone from nine or 10 branches to three branches.
However, when the announcement was made, it came as a shock to us and to the staff. Although I think that the staff can be snapped up, a lot of people have been loyal to Airdrie Savings Bank for many years. A lot of people have worked there for 40 years, and there are families who work in the bank, so the closure is a community hit. It is a shock. I am confident that the staff will be able to get other jobs, given their skills, but there is a confidence issue and people are quite institutionalised—I do not mean in a bad way; the point is that when someone has been in a job with a company for a long time, leaving is a difficult prospect. There will be challenges.
The closure was sort of expected, though, because of the low interest rate, the increase in regulation and the demands of the digital age. We could see that the bank was struggling.
Do Unite and the staff basically agree with the board’s decision—
Unite will never agree to job losses.
I did not mean the job losses. Did you agree with the decision to close the bank rather than to struggle on or do something else?
Would I like to see the bank try to struggle on? I am not a banker—I never have been and would not want to be—but I understand that the bank has explored every avenue and I have never heard anyone come up with an alternative.
A few years ago, a number of people thought that Airdrie Savings Bank was the model for the future, so there was an injection of money, I think, and a new branch was opened in Falkirk or somewhere—I cannot remember.
That would be the international branch. [Laughter.]
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Was that overly optimistic? What happened to that branch?
That is a good example. Back in 2010, it was widely reported that a number of Scottish businesspeople were supporting the bank and I think that the media probably reported it as their having invested in the bank. However, as we have discussed, there is no mechanism to invest funds in Airdrie Savings Bank, which is one of the strategic challenges that we have had. Retained reserves and capital are built up by retained profits. In essence, we worked closely with those businesspeople to establish the branch out in Falkirk.
In 1997, Airdrie Savings Bank closed a branch in Whifflet, but it kept the expertise in the bank and redeployed it to Falkirk in a new launch. The Falkirk branch started off buoyantly. We were pleased with the results and the way it was heading. However, not long after we moved in, things changed structurally around Falkirk: a new retail park opened further out of the town, the footfall in the town centre appeared to get even less and the business that we had coming through the door fairly quickly tailed off. When the lease came up for renewal, we decided not to renew it.
We thought at the time that putting ourselves out there had been a successful escapade to an extent but we had not established a model that could be replicated and on which the bank could build.
Wendy Dunsmore mentioned that recklessness and criminality in the financial sector ultimately led to the regulatory regime that is now having an impact on your sector, although it was never designed for your sector because your sector did not cause any of the problems.
I will reflect on John Mason’s point about other European banks. In Germany, for example, there are 431 banks in the Sparkasse network. They have €1 trillion of assets and 15,000 branches and they employ more than 250,000 people. The Sparkassen are a key support of German industry. It is not that the savings bank model cannot work; it works extremely well in countries such as Germany. What wider lessons are there for our banking and savings culture in the UK? Is there something fundamentally wrong with the way in which the UK approaches the organisation and structuring of banks?
Professor Munn, do you have a comment on that?
Thank you—I think.
We do not have a savings culture. There is good logic in that because, with a very low interest rate environment such as we have and easy and cheap accessibility of credit, the savings culture that we once had has evaporated and no longer exists. There was once a strong savings culture and Airdrie Savings Bank did a lot to encourage it, especially through the work that it did in schools. We had a national savings system in the UK but that was abandoned in, I think, the 1970s, when the other problem that we talked about earlier—high inflation—did a lot of damage to the savings culture. We now have a spend-before-you-earn culture. That is not conducive to the running of banks such as Airdrie Savings Bank.
The wider culture in countries such as Germany is that people save in savings banks.
It is a very different culture.
They invest in local industry to create jobs that generate wages that they save in the bank that finances the industry. The broader question is about the ecology of banking and how it is connected to the country’s industrial, manufacturing and economic base as much as it is to do with the financial sector itself.
The Germans do not buy houses, and bank cards are very moderately used there. That is a serious difference with Scotland and it is hard to make the connections.
Something that has always been said about banking in the United Kingdom is that it does not serve industry particularly well. However, nearly all the academic studies that have looked at that have countered that argument and said that it is not true. A lot of the things that I have written in banking histories have also confirmed that. Whether we look back to the Macmillan committee in 1931 or beyond that to other criticisms that have been made, there has been no great evidence to show that industry has been starved of funds.
I have had lots of arguments about it over the years as, given my background, people look for an argument and say, “You banks are not doing your job properly and you are not helping local industry.” However, when I was running the Committee of Scottish Clearing Bankers for a time, we asked the banks every few months how many accounts for new businesses they had open—that could have included hobby businesses, which are certainly not registered for VAT like businesses with a turnover of £60,000—and we came up with very substantial numbers. Those numbers gave the lie to what was often reported in the press, which was that new business generation numbers in Scotland were poor compared with other countries. They were not; it was what was being counted and how it was being counted that made the difference.
If we are trying to suggest that there is a major cultural or structural difference between Germany and the UK, I would say that there might be, but I do not think that that includes any deficit on the part of the banking fraternity.
Professor Munn said that the culture in Germany is very different. You commented—if I understood correctly—that people there tend to use cash, rather than cards, more than do people in this country. Rod Ashley made a comment about the opening of a bank branch in Falkirk being followed by a new shopping centre being built elsewhere and footfall for the bank falling away. Apart from the cultural differences in how people approach money, are there other factors that might support the model that Andy Wightman is talking about? Perhaps in this country there is no joined-up thinking, but in Germany there is.
It is certainly the case that the way in which people approach money is changing quite dramatically. We have talked in the UK about the cashless society for quite a long time; now it seems to be arriving, although it has taken some time to get here. The point is that it is almost unheard of for people to go into their bank branch. They do not use cheques to make payments any more; it is all done online and through telephone banking. The level of need for a branch network, compared with what it was when I was a young bank clerk in the 1960s, is incredibly different. Large organisations have to deal with those changes.
I am not an expert on Germany—far from it—but we should not think of it as having some wonderful model for us all to follow. Its big commercial banks—in particular, Deutsche Bank—have had great difficulties, too. However, Deutsche Bank in Germany is not a behemoth such as the likes of Barclays are in the United Kingdom—Deutsche Bank has only 5 or 10 per cent of deposits. Where Germany has had an advantage is in that it has a lot of regional banks, but they are not small organisations the size of Airdrie Savings Bank. The Sparkasse savings bank model might to some extent have had its origins in Ruthwell, as the rest of the savings bank movement did, but it moved in a different direction in the 19th century. The Sparkassen became, to all intents and purposes, commercial lending banks at a very early stage in their history. They are considerably larger than the likes of Airdrie Savings Bank, with something in the order of £150 million of deposits.
I would like to say something about footfall in branches and the wider context. In my view, the big banks have deliberately looked for branch closures and have staff with targets to get people to do internet and telephone banking. Staff who do not hit their targets are put through a performance management process, which can end up in dismissal. The big banks have determined that they want call centres or internet banking centres, which has an impact on footfall.
Another thing that has stopped people—including me—going into branches is staff having to try to sell us something every time we go in. Rather than having to keep saying, “No, I don’t want anything”, people decide to do internet banking instead. That is having an impact on and creating problems for rural communities, in particular.
The banks have deliberately taken that approach. Their strategy has not been as visible to our communities as it should have been.
Do you accept that there might be strategies that have unintended consequences?
I absolutely do. Let us consider what the banks are doing just now. I will pick a recent example. Inverary used to have a Bank of Scotland and a Royal Bank of Scotland. The Bank of Scotland closed in November or December and the Royal Bank closed, I think, in January. People were told, “You’ve got digital banking”, but people in that rural community do not have good internet access, so they will be cut off from banking. In addition, buses are being cut back. The nearest towns are Dumbarton and Lochgilphead, so the vulnerable people who might use banks—older people, younger people and disabled people—cannot get to banking facilities and cannot access banking without good internet access, which Inverary does not have.
There are unintended consequences, but I am not convinced that they are really “unintended”. Branches are expensive to run and banks exist to make money for their shareholders—although not Airdrie Savings Bank, which is a true bank.
Professor Munn mentioned cheques. If I recall correctly, in the recent past there was a move to get rid of cheques, but that did not happen—I think, because people pointed out that loss of the service would present difficulties to elderly people and others who have to pay by cheque. Will you comment on that?
We have been asking about lessons for the future. What can we learn from experience about how to ensure that elderly, disabled and other vulnerable people, and people who do not have good internet access, can continue to access banking services?
From the last time that I caught up on the issue, I understand that it is still the banks’ ambition to end the use of cheques. There are plenty of other ways to make payments. As we know, we can make a payment over the telephone or on the internet—assuming that there is a good internet service, which is clearly not always the case. It is still possible to send a cheque through the post.
As to what the future holds—I wish I knew. We are clearly at the point of a serious change in how people deal with money and run their financial affairs. I wish that I could see clearly what will happen. Historians like me are supposed to be able to do that, because history is supposed to teach us what the future holds. All I can say is that there will be more of the type of change that we have been talking about.
It is clear, too, that the entry of all sorts of other bodies—for example, Apple—to the payments arena will bring further change and will make inroads into the business of the commercial banks. If we allow that to continue as it is already happening, and to expand, we will get to the point—we might actually be in this situation already—at which the commercial banks experience the same pressures as the Airdrie Savings Bank experienced, for the simple reason that it is virtually impossible for a commercial bank to make money from running current accounts nowadays. That is why they have become sales organisations—they are trying to make their money by doing other things.
10:30
Having stood for the Airdrie and Shotts constituency twice in Scottish Parliament elections and having been elected in 1999—although I did not get elected in Airdrie and Shotts, but was elected on the regional list—I find this a very sad occasion. I know that the bank is very well respected and trusted by the local community. The responsible way that you are carrying out the bank closure shows why, Mr Ashley. I commend you for the way in which you are going about your business; it is absolutely correct.
Your submission makes it clear that quite a number of issues put pressure on the bank. Would one or two items being avoided or not happening have made a difference? Was there a killer blow?
The one overarching factor that has influenced the business model of the bank and which has been outwith the bank’s control has been the “lower for longer” interest rate position that we find ourselves in.
I think that the board of trustees took the right actions when the rates dropped to 0.5 per cent back in 2008-09. As we discussed earlier, they had built up reserves that were used to provide the service in the community, but we looked to see what we might be able to change. I do not know about Professor Munn, but since 2009 I have been attending presentations at which economists have been telling me that a rise in the rate is just around the corner. We are still hearing that in 2017.That is partly influenced by the central Government policy of keeping interest rates low and providing support behind the scenes such that the larger banks can take money from the Government at low cost and pump it out in the form of low interest rates. That manifests itself in interbank lending rates being low for the bank. We all know that the retail deposit rates, which determine what we receive in interest, are very low. In the mortgage market as well, deals can be offered with very low rates of interest, which makes it even more difficult for organisations such as ours to enter that arena.
In summary, the one item that has affected the model most is the interest rate environment.
The interest rate is also the item that you have the least influence over, is it not?
Yes.
I suppose that only the Government has the power to influence that and, in the climate that has existed, changing it would have been an impossible ask, even to save your bank.
Yes. The low-interest environment is a challenge that is appreciated by other banks, as well. However, their business models are—Wendy Dunsmore alluded to this—structured completely differently from ours, in that they have other ways to raise income.
I would like to clarify one thing. I understand your point about the Government supporting certain schemes—for example, lending schemes for first-time buyers—but is it not the case that interest rates worldwide are low at this time? Also, it is the Bank of England that sets the interest rate, independent of Government.
Yes.
However, I do not think that interest rates are universally low worldwide—for example, in Australia they have not dropped to as low a level as they did in this country. They did across Europe and in America, although they have crept up a smidgen from where we were.
The Bank of England’s independence to control inflationary pressure is right. I am thinking not necessarily of the first-time-buyer type of schemes, but of Government schemes such as the funding for lending scheme and its successors. The bigger banks could access that scheme through the Government to obtain funds at low cost.
Was the Airdrie Savings Bank able to do that, or did that scheme not fit with your product?
Technically, we could have applied for the funding, but it was a question of scale and cost: we were not big enough to take advantage of it.
I have a quick question for Mr Ashley. What happens to a surplus at the end of a winding up?
The governing structure for the bank is the Savings Bank (Scotland) Act 1819. There is also a set of rules, orders and regulations that are subject to the jurisdiction of the sheriff principal—who in our case is close by, in Airdrie. Under those rules, if there is, in the final winding up of the bank, a surplus of assets over liabilities—at the moment, we do not know whether there will be, but we anticipate that there may be—those assets must be returned to depositors in such proportion as they had deposited in the bank, at a date to be established by the board of trustees.
To be honest, we have not given a lot of thought to exactly when that date would be. It is likely that it would be a date in the past rather than a future date. We also suspect that if there is a surplus—we hope that there will be—payments would be small because of the large number of low-level depositors that we have. The board is, consequently, considering various options, among which is the question whether there is a way of approaching the court to establish whether the funds could be used for the community or charitably. However, I have no definitive answer for you at this point.
What was your relationship with the PRA like? Was it easy or difficult to deal with?
I would describe the relationship with the PRA since I have been at the bank—I joined in 2013—as very encouraging. We have had key managers appointed to the bank who have remained with us over that period and with whom I continue to work on a week-to-week basis. They have taken quite a lot of time and effort to understand our business model and have listened to our proposals for various strategic options. They have been supportive and challenging, as they have needed to be, in relation to that. As we know from the papers, their objective is to ensure a strong and secure financial sector; I used the word “encouraging” because that is what they would like the entities to become. I have been encouraged by the relationship that we have had with the PRA, and we continue to work with it.
I want clarification on a couple of points. You mentioned that you consider the bank to be a social enterprise. Did the bank, as a social enterprise, receive any funding or other help from any Government agency—for example, Scottish Enterprise or Social Enterprise Scotland?
I am not sure which bracket the support would fall under. For the two projects that helped us to move into the intermediary mortgage market and to establish ourselves in the social enterprise sector, as I mentioned earlier, we obtained funding and support from Scottish Enterprise, including staffing costs to get the projects established. That was the support that we obtained. I would not describe it specifically as social enterprise support, but it was certainly helpful and appreciated.
My other question is on the winding-up process. What will happen to any outstanding loans or mortgages that you have? Loans and mortgages tend to be longer-term assets. What plan do you have in place to wind down those longer-term assets?
We have been working with the TSB, which has been our partner in the process, and the secured lending book has been sold to it. Mortgages are currently in the process of moving across to the TSB.
We have contacted customers who have unsecured lending to explain the situation and work with them to find how they might be able to repay us. Much of that lending was not profiled over a large outlying number of years—the vast majority of it will be due for repayment in the normal course over the next 12 to 18 months, and a lot of it will be able to remain on normal repayment terms. Some customers have said that they will move elsewhere, but we are committed to working with each of our customers to find a solution that works for them.
Richard Leonard has a final question.
I do not want to raise false hope or put words into your mouth, Mr Ashley. However, in answer to a question that Jackie Baillie posed, you hinted that there may be the possibility of a phoenix rising from the ashes of the Airdrie Savings Bank. Given the great reputation that the bank has established over 180 years, is there any possibility of anything being rescued, maybe through a different model of ownership?
My hesitation is due to uncertainty about what the future might hold rather than reluctance to say anything definitive. The position at the moment is that the bank will wind down. The current accounts in the branches will close at the end of April. We will then have a residual set of deposits left, and the trustees will need to find another deposit taker to which to move that book of residual assets.
The project has been scoped out to that point, and we are looking at the options in relation to that. I do not want to give any hope that there is something there, but how it will all end up being settled has yet to be established. In a practical sense, we have to work on the basis that we are winding down and that there will be some sort of community legacy from the bank, rather than a banking legacy.
That legacy might take the form of a credit union.
That is the specific point that Jackie Baillie and I were talking about. Nothing in that vein has been discussed, but I can see the similarities between the bank and a credit union. As Charles Munn said, if we were based in America or Canada, the Airdrie Savings Bank would be a credit union, because that is the model that it follows. The two are closely related.
Banks and credit unions operate under quite different regulatory regimes, though.
Yes. To an extent, the credit unions benefit from having a specialist sourcebook with regard to regulation, where everything is kept condensed. I have been out of that sector for a number of years, so I cannot comment on the current position, but the regime was quite different from that under which the banks operate.
Andy Wightman has a final, final question.
Assuming that winding up is completed, what will you do with the artefacts and archives that the bank’s long history must have generated? Are you planning to deposit them with the National Archives of Scotland? What arrangements have been made?
I have been contacted by a number of organisations including the Business Archives Council of Scotland. I have also spoken to the Savings Banks Museum in Ruthwell, regarding the archives there, and to CultureNL, which operates within the local authority in which we are based—North Lanarkshire—and which has a heritage museum at Summerlee. I am confident that the archives and legacy will end up in the most appropriate place for them, where they can be seen and shared with the community.
That concludes our questions for today. I thank all three of you for coming. The circumstances in which we have invited you here are regrettable, if I may put it that way, so I am sure that committee members would like to send their best wishes to all those who are involved—in particular, the workers at Airdrie Savings Bank—and wish you all the best for the future.
We will return to public session at 11.30 am.
10:45 Meeting continued in private.