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POLARC12 (2")
POLARC12/8-15
POST OFFICE LIMITED
(Company no. 2154540)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE SUB-COMMITTEE
held on Tuesday 13 November 2012
at 2pm at 148 Old Street, London EC1V 9HQ
Present:
Alasdair Marnoch Chairman of Committee
Tim Franklin Non-Executive Director
Neil McCausland Senior independent Director
Susannah Storey Non-Executive Director
In attendance:
Alice Perkins (AP) Chairman, Post Office Limited
Chris Day (CD) CFO
Paula Vennells CEO (item 12/11 only)
Sarah Hall (SH) Head of Financial Control and Compliance
Nick Kennett (NK) Financial Services Director (item 12/13 only)
Alwen Lyons (AL) Company Secretary
Hugh Flemington (HF) Head of Legal Services {item 12/11 only)
Lesley Sewell (LS) Chief Information Officer (item 12/11 only)
Malcolm Staite (MS) Interim Head of Risk Governance
Malcolm Zack (MZ) Head of Internal Audit
Stephen Collins (SC) Audit Manager, Royal Mail Group Internal Audit {item 12/42 only)
Angus Grant (AG) Audit Partner, Ernst & Young {item 12/12 only)
Jeremy Midkiff (JM) Audit Manager, Ernst & Young (item 12/12 only)
POLARC12/8 INTRODUCTION
(a) A quorum being present, the Chairman of the Committee opened the meeting
and welcomed all those present.
(b) The Chairman noted that the Committee would not be able at this meeting to
discuss Risk Management in detail, as the executive team were still working
through the processes and the necessary recruitments had not yet been
completed. The approach to risk management would be a matter for
particular focus at the next meeting in February.
POLARC12/9 GOVERNANCE
(a) The Chairman asked MZ to talk through the new format proposed for the
Terms of Reference of the Committee, including an outline schedule of
matters to be discussed and a form of standing agenda.
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(b) Following discussion, it was agreed that the revised Terms of Reference for
the Committee, dated November 2012, are approved and adopted subject to
an amendment in 2.1 to clarify that the HR & Corporate Services Director and
the General Counsel were the same role.
(c) These Terms of Reference would be included in the pack of corporate
ACTION: Company governance documents to be approved by the Board in January 2013.
Secretary
(d) The Committee requested that the banking and treasury delegated authority
limits discussed at the Board meeting on 23 October 2012 should return to
the ARC in February for discussion and that outstanding balances and any
ACTION: CD breaches by counterparties be brought to the attention of the ARC.
(e) The Committee asked for sight of the internal audit reports completed since
April 2012, and a status report on the audit actions to be presented at the
ACTION: MZ February meeting.
(f) The Committee requested discussion at the February meeting on:
(i) the policies in place to mitigate against key business risks (a paper to be
produced by the Head of Risk Governance); and
(ii) the process for establishing and ensuring compliance by the Business
with those policies and with regulatory requirements. It was recognised
that this exercise would take some time, with priority areas starting to
become clear over the course of 2013.
ACTION:MZ/SC
(g) The CFO and HR & Corporate Services Director would then lead a session at
the Board to give comfort that the Business understands its regulatory risks
and has the policies in place to monitor and mitigate.
ACTION: CD/SC
POLARC12/10 ANNUAL REPORT AND ACCOUNTS AND HALF YEAR TRADING
STATEMENT
(a) CD presented the latest draft of the half-year trading statement. It was noted
that the DVLA decision had now been announced and could therefore be
included in the statement.
(b) {twas noted that the trading statement had not been reviewed formally by
Ernst & Young but it was confirmed that the basis of preparation was
consistent and that there had been no major changes in accounting policies
or practice.
(c) The proposed date for release of the statement to the press and general
public was 22 November 2012. Discussions would be held separately with
the Shareholder.
(d) The Committee discussed the tone of the statement and the comments
received to date from members of the Board and it was agreed that final
comments would be input by 14 November, after which the statement
ACTION: CD would be re-circulated to the Board for final approval.
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ACTION: Company (e) A copy of the final statement and press release would be circulated to the
Secretary Board.
(f) The paper presented by SH, setting out an approach for preparation of the full
year accounts for 2012/13, was considered.
(g) After discussion it was agreed that:
(i) Post Office should not take advantage of the exemptions from being a
wholly owned subsidiary of a UK parent producing group financial
statements;
(ii) Post Office should continue to report under UK GAAP but the
consolidated financial statements will be under IFRS;
(iii) the Post Office Annual Report and Financial Statements should be
prepared as one formal document for lodging at Companies House;
(iv) Post Office should include the additional Business Review disclosures
applicable to quoted companies where appropriate;
(v) Post Office should aim to meet the elements of the UK Corporate
Governance Code and DTR disclosure requirements on corporate
governance that are appropriate; and
(vi) Post Office should comply with legal requirements concerning the
disclosure of directors’ remuneration but would not seek to go beyond
the statutory level of disclosure for the financial year 2012/3.
A full analysis of Post Office’s compliance with the UK Corporate Governance
ACTION: Company Code was under way and would be provided for discussion by the Committee
Secretary at its next meeting.
There appeared to be nothing which would prevent the Post Office from
confirming that it upheld the principles of the Code, even if some of the
detailed recommendations would not be applicable to a Government-owned
organisation.
POLARC12/11 RISKS — HIGH RISK CONTRACTS
The CEO, LS and HF joined the meeting to provide an update on the
information security issue which had recently been faced by the Post Office.
An approach to establishing the risk profile of customer data held within the
Post Office had been set out in the paper from LS and this was discussed.
The Committee thanked the CEO and the Business for the rigour with which
they had handled the issue and asked for a short update report in mid-
December followed by a formal report on information security for the next
ARC meeting in February, including a noting paper on High Risk Contracts.
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The Committee asked to be kept informed in the meantime of any actions
necessary to mitigate against any actual or perceived liability on the part of
ACTION:LS the Post Office.
POLARC12/12 INTERNAL AND EXTERNAL AUDIT
(a) SC, AG and JM joined the meeting.
(b) MZ was introduced as the new Head of Internal Audit. He explained the
future audit team he was recruiting for the Business and that going forward
the audit plan would be based on the key risks which would be signed off by
the ARC. He confirmed the activity in the Audit plan for 2012/13 and that
Royal Mail's Internal Audit Team would assist Post Office up to 31 March
2012.
{c) The Committee agreed that there may be a need to monitor the increased
strategic risks driven by separation and transformation, but that there also
needed to be a focus on compliance within the Network.
(d) The Committee asked for a summary of the areas covered by RMG Internal
ACTION:MZ Audit reports to be presented to the ARC in February.
Stephen Collins feft the meeting
(e) AG, the Ernst & Young Audit Partner responsible for the Post Office external
audit, reported that the previous year's audit had been finalised. He expected
that 2012/13 would be a challenging year for the Business in several areas
because of separation and major change, and that the audit would need to
focus on separation, pensions, and taxation with an overlay of IT. He set out
the proposed approach to external audit of the full year accounts and the
outline timetable. The detailed focus of the audit would be:
(i) Revenue recognition and the accounting treatment across diverse
revenue streams;
(ii) Counterparty risk;
(iil) Pension valuation and accounting;
(iv) Separation accounting risks; including pensions and treasury,
(v) Valuation of accounting provisions;
(vi) Risk of fraud/burglary in the Network and Cash operations;
(f) The ARC was comfortable with the approach, alongside the separate
ISAE 3402 {T audit which had been jointly commissioned by the Post Office
and Fujitsu.
(g) The Chairman asked at what level of materiality the E&Y team would report.
AG explained that this would be similar to previous years. Although E&Y did
put a figure on P&L materiality, they would propose to report any identified
audit adjustments above £600k to the Committee and, as a general rule,
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insist on changes to the accounts for any single item or accumulation of items
with an effect of over £5-6 million. This was accepted.
(h) The Chairman informed the meeting that he would pick up the Ernst & Young
fees with the CFO outside the meeting
ACTION:AM/CD
(i) The external audit plan was agreed. The external auditors left the meeting.
POLARC12/13 MATTERS REFERRED TO ARC BY THE BOARD
Governance of the “Eagle” Contract
(a) NK joined the meeting.
He presented the paper and explained the governance processes now in
place with the Bank of Ireland (Bol) following agreement of the new contract.
The Committee was informed of the arrangements and the governance
committees put in place to monitor performance. The Committee asked that
the minutes of future Regulatory Risk Committees (RRC) be provided for the
ACTION: NK ARC.
(b) NK noted the termination rights currently contained in the contract. Bol was
obliged to provide certification within 15 days of each quarter end to assure
Post Office that Bol was meeting its requirements in respect of:
(i) Tier One Ratio and Capital buffers
(ii) Liquidity
(iii) NSFR requirement
and that it had not breached any of the terms of the contract creating a
Termination Obligation.
(c) The Chairman asked if this gave the Business sufficient warning of any
problems. NK assured the Committee that the Bank was obliged to give Post
Office early warning of any capital or liquidity problems and Post Office had a
buffer above the regulatory and statutory requirements set by HM Treasury
(HMT), the Bank of England (BoE) and the FSA.
(d) Post Office had also established a system for tripartite meetings with HMT
and BoE, to which the FSA was also invited. The purpose of this meeting
was to give Post Office a medium to long term view of the banking
environment and how any developments might affect the Post Office.
(e) NK explained that the FSA would soon be splitting to form two organisations:
the Prudential Regulation Authority (PRA) and the Financial Conduct
Authority (FCA). This should lead to a strengthening of regulatory
relationships and give the Business more comfort.
(f) The Committee asked NK to provide an interim update on the regulatory
ACTION: NK position in September 2013, 6 months after the changes had taken effect.
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(g) The Chairman noted that it would be useful at the same meeting to look at
ACTION:NK scenarios in which Post Office would need to respond to a termination event.
(h) NK reported that Post Office deposits had grown substantially above the
planned £16.6 billion target agreed with the FSA. The parties were working
together to agree a commercially sustainable position on pricing for Bol whilst
ensuring protection for Post Office customer assets and the Post Office
brand.
NK explained the securitisation of assets by Bol and noted that the new
contract required consent from the Post Office to securitise any Post Office
customers’ assets. The terms were designed to ensure that Post Office
customers’ assets were managed effectively but also ring-fenced in the event
that a transfer to an alternative provider became necessary.
NK then left the meeting.
Uncommitted Credit Facilities
ACTION: {i) I The CFO asked for the Committee's views on the proposals relating to
CD/Company uncommitted loan facilities which had been put forward to the Board. He
Secretary noted that banking counterparties would require a resolution of the full Board.
{j) I The Committee discussed the proposals to enter into two loan facilities. CD
confirmed that these proposals had been discussed with the Shareholder and
no concerns had been expressed.
(k) The Committee endorsed the following recommendations to the Board:
(i) approval for Post Office to enter into external borrowing facilities up to a
maximum value of £100m, such that external borrowing of up to £50m
may be drawn down at any one time;
(ii) approval for the CFO and Head of Corporate Finance to conduct
negotiations with counterparties and sign and deliver the loan and
related documentation
(iii) approval for the form of Board resolution included in the paper, subject
to review by Susan Crichton (Head of HR and Corporate Services).
POLARC12/14 ANY OTHER BUSINESS
ACTION: (a) It was agreed that the schedule of meeting dates for 2013 should be revised
Company to allow for meetings in February, May, September and November. The
Secretary Company Secretary was asked to recirculate the dates.
POLARC12/15 CLOSE
There being no further business, the meeting was declared closed.
I Alastair Marnoch I