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POLB 04/109 — 04/129 ;
Post Office Limited
(company ho..2154540)
Minutes of the meeting of the Board
held at 80-86 Old Street, London
eld at 80-86 Old Street, London
on December 15" 2004
Present:
Sir Michael
Hodgkinson Non-executive Chairman
David Mills Chief Executive
lan Anderson Human Resources Director
Peter Corbett Finance Director
Brian Goggin Chief Executive, Bank of Ireland
David Miller Chief Operating Officer
Gordon Steele Sales & Marketing Director
In attendance:
Alan Barrie Operations Support Director, Royal Mail Group (for
POLB04/129)
Jonathan Evans Company Secretary 4
Neil Qwen Notes
-Kevin Seller Head of Banking and Financial Services Clients
David Smith Delivery Director (Acting IT Director)
Clare Oldstein Investment Director, Group Finance (for POLB04/122)
Patrick Waldron Chief Executive, Post Office Financial Services (for
POLBO04/122)
Apologies: . ~
Allan Leighton Chairman, Royal Mail Holdings
Graham Halliday Banking & Financial Services Director
POLB04/110 MINUTES OF PREVIOUS MEETING POLB(04)8™
(a) The Board approved the minutes of the Board meeting of 13"
October 2004.
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(e)} Card Account Article: Although the article explaining the
reasons for Card Account outage had not appeared in the
December issue of The Subpostmaster, agreement had been
reached that it would feature in the January issue;
Action: (f) Civil Orders: In the évent of fraud against the company, David
David Miller Miller would ensure that the pensions of fraudsters. were
targeted to help ensure the Company was reimbursed.
POLB04/112 CHAIRMAN’S BUSINESS
(a) Sir Michael Hodgkinson reported the following matters to the
Board:
POLB04/113 CHIEF EXECUTIVE’S REPORT
(a) David Mills reported the following matters to the Board:
(b) Alun Michael - Defra: A letter had been received from Alun
Michael and a dialogue would continue to ‘promote sustainable
rural communities;
(c) Nigel Leese: David Mills had written to Nigel Leese to refute
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(d)
(e)
(f)
(g)
(h)
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allegations regarding the conduct of Post Office Ltd in the
handling of closures and franchises. Leese had also advised of
changes atthe DTI. More of the relationship would be
controlled by Christina McComb;
Trade and Industry Select Committee: The meeting had gone
well. and had attracted minimal publicity. David Mills thanked
David Miller and Sif Michael Hodgkinson for their contribution;
Strategic.Plan: The strategic plan had been agreed with the
Royal Mail Holdings board. The targets for next year would be
very stretching;
Diversity Training Part 2: The second part of the diversity
training programme had been undertaken;
Move of Headquarters: The Royal Mail Holdings Board had
decided against moving headquarters, primarily due to issues of
negative perception;
EC Off-site: An EC off-site, meeting had taken place on 13"
December, which. had proved very productive.
BUREAU CREDIT. AND DEBIT CARD ACCEPTANCE 4
POLB(04)91 Es
(a)
(b)
(c)
(d)
(e)
(f)
Gordon Steele presented the Board with a paper on debit and
credit card acceptance. The Board noted the paper, and in
particular that:
foreign exchange transactions were conducted in Post Office. *
Ltd branches in: partnership with: First Rate Travel Services
(FRTS), a joint venture between Bank of Ireland and Post Office
Ltd;
Post Office Ltd had offered card payment for foreign exchange
transactions for 8 years via a system provided by Natwest.
Changes to banking rules now required mandatory conversion
to the Chip and PIN system. Consequently, Natwest were
unwilling to supply this service beyond November 2005 without
changes to the infrastructure to include ‘pin-pads' and Chip and
PIN capability;
IT development was proposed as part of the planned Horizon
S90 software release, planned for October 2005;
the total investment was £4.3m (£3.0m from FRTS and £1.3m
from Post Office Ltd).
The Board agreed to the investment of £4.3m subject to the
successful conclusion to the negotiations with FRTS to ensure
a £3m contribution.
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POLB04/115_ . AUTOMATED OUTPAYMENTS POLB(04)92
(a) Gordon Steele presented the Automated Outpayments
investment case to the Board. The Board noted the paper, and
in particular that:
(b). the proposal consisted ofa £5m investment over 3 years to
develop an Automated Outpayment capability on the Horizon
system;
(c). the automation would simplify and enhance Postal Order and
NS&l warrant transactions, enable development of the
Moneygram® product; and remove legacy‘systems;
(d) Group. Investment.Appraisal’s comments: on the case had not
yet been obtained..
(e) The Board considered the benefits of the investment, including
the estiniated £7.6m return over 5 years and the ‘positive overall
effect that a. modern. payment method would have. on the
customer experience. The Board agreed that:
(i). authority:to approve the final’investment:case;’ »
‘including £250,000 for the:replacement of.the; : °
Postal Ordertrace.reader ‘at Chesterfield, would be
delegated 'to,the Executive. Committee;
(ii) this.authority would be Subject tothe Group
Investment:Committee.endorsing the business
case.
POLB04/116. PRODUCT ANALYSIS POLB(04)93
(a) ‘Peter Corbett presented a financial analysis of Post Office. Ltd
products for 2004/05 Year to, Date Period 7: The Board noted
. the report.
POLB04/117 SOLVENCY POLB(04)94 ‘
(a) I Peter Corbett reported to the meeting the current’financial
position of the Company. In particular, it was: highlighted that,
unless appropriate new financial support arrangements were
put in place, the Strategic Plan showed ‘the company would.
become insolvent in'2006/07. It'was also reported to the Board
‘that he had attended yesterday with officials. from the
Department of Trade and Industry regarding the Company's
financial position and the:availability of support going forward;
(b) Having’ discussed the position in detail, the: Directors. agreed
that, on the basis of the report:and the discussions held to date
with the Department of Trade and Industry, they believed that
the Company did have a reasonable prospect of avoiding
insolvent liquidation and that, accordingly, the Company could
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continue to trade on that basis. It was further agreed that the
solvency of the Company-should-be-carefully monitoredand
teviewed regularly on an ongoing basis and that, in particular,
any material new financial commitments should be considered
very carefully;
(c) Peter Corbett further explained the situation concerning
impairment. The Company had been working on the
assumption that it would no longer have to impair its fixed
assets. However, the financial situation was such that the
Company may néed to continue to impair up to £20m of assets,
although this could be neutralised by utilisation of the proceeds
of asset disposals, critically reviewing all non-essential Capital
Expenditure-and reversing the surplus severance provisions.
Afterdiscussion:the Board agreed that a decision on
impairment should not be taken until nearer the time of the
closure of the‘accounts: The impact of the compensating action
should be avoided if possible as they would be unhelpful for the
Company's progress towards its strategic plan objectives.
(d) The Board was reminded that discussions were taking place: at
Royal Mail Group level with the DT! about re-casting the
Group's balance’sheet, including that of Post Office Ltd. The
Board saw possible advantages in the Post Office Ltd Board
making its concerns known directly to the DTI about the funding
difficulties of the Company, but only to the extent that such an:
approach supported the discussions taking place between
Royal Mail Group and DTI.
(e) The Board agreed that:
(i)
(ii)
Action:
Jonathan Evans
iii
Action: «a
Jonathan Evans
iv
Action: )
Peter Corbett
discussions should continue with the Department
of Trade and Industry and with other companies in
the Royal Mail Group with a view to agreeing
appropriate financial support arrangements going
forward;
Jonathan Evans would draft:a letter to Patricia
Hewitt informing ‘her of the:financial prospects of
the company, and would seek advice from Royal
Mail Group about the appropriateness of sending
it; :
the latest
would be circulated to the Board with the minutes
of the meeting;
the Board would review the Company's Profit. and
Loss, balance sheet and cash flow projections at
each future Board meeting
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POLB04/119 RISK AND COMPLIANCE COMMITTEE POLB(04)96
(a) Peter Corbett provided a short presentation on to highlight the
work of the newly formed Risk and Compliance Committee. The
Board noted that:
(b) the Risk and Compliance Committee was chaired by Sir
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Action:
David Smith and
David Miller.
Action:
Graham Halliday
(c)
(d)
e)
(f)
(g)
(h)
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Michael Hodgkinson. Graham Halliday and David Miller
regularly contributed to it;
the scope of its activity included audit, compliance and legal
issues;
its primary aim was to ensure the service and conformance
elements of the business. were working together properly. Rod
Ismay (Head of Risk and Control) was working closely with
Lynn Hobbs (Head of Network Reinvention) and Tony Marsh
(Sales and Service Programme) to help ensure this is achieved;
the next quarterly meeting would be held on 5" January 2005 to
discuss Branch Control, Vital Few Controls, Audit Reports, Anti-
Money laundering measures, Crime and Fraud and the work of
the Group Audit Committee;
the Risk and Compliance Committee had found that although
the overall trend of losses due to fraud had fallen from an
annual rate of £29m to.£20m, this area still represented a
significant risk. Brian Goggin informed the Board that as
banking controls had tightened, fraudsters had become more
sophisticated in response. The banking business had found the
risk of fraud perpetrated by employees particularly difficult to =.
manage. A fraud migration risk existed with the advent of chip:
and pin;
controls assurance and self-assessments were taking place
within Post Office Ltd. this month, and an assurance testing plan
would be agreed with the units. 3
The Board agreed that David Smith and David Miller would =:
investigate the possibility of arranging a dummy Bureau
transaction with a Natwest Card (so that the PIN was utilised) to
avoid the risk on bureau transactions. Graham Halliday would
continue to investigate whether an.exemption on credit card
acceptance could be obtained for bureau transactions.
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FUNCTIONAL REPORTS
FINANCE REPORT POLB(04)100
(a)
(b)
(c)
The Board noted the report and in particular that:
The new business plan targeted closing the gap left in 2005/06
by the loss of benefits income — profit impact next year £140.
million — to keep next years results on the same level as this.
year — a loss from operations excluding rural funding of
£75million. A further £50 million profit improvement was
projected over the life of the plan through 2009/10. The current
draft excluded a solution to rural funding post 2008;
Period 8 profit from operations was a’ loss of £12.7m, £4.4m
adverse to budget. The variance was due to a £5% million
provision for the irrecoverable VAT issue on banking back office
processing costs. The YTD profit from operations was a loss of
£62.3, £1.3m (2%) adverse to budget. The full year forecast
remained at £3.8m favourable to budget. The operation of Card
Account was effectively providing a £5% million benefit to
Government at Post Office. Ltd’s expense.The Board agreed
that this unreasonable situation should be addressed
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immediately. Graham Halliday would draft a suitable letter to
send to Adam Sharples requesting the issue be escalated to
Ministers through MISC19. The letter would contain a warning
Action:
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POLB04/124
stating the issue would be escalated to the highest levels if.a
satisfactory resolution could not be agreed.
OPERATIONS REPORT POLB(04)101
The Board noted the report. The Board further noted that:
(i)
(iii)
Action:
David Miller
Directly Managed Strategy: Union discussions had
reached a difficult stage. The CWU were clearly
prepared to contemplate a significantly reduced
directly managed network but had high
expectations of the ‘price of their cooperation’. The
Board agreed that this matter would now feature
as a regular item on the Board agenda; .
Christmas Closing Times: Christmas Closing times
were proving to be a very difficult issue. In
response to competitors’ closing times, and
because three heavy days POCA payments would
fall due on Christmas Eve, Post Offices would stay
open until 16:00. The CWU had called for a ballot
ona one-day strike despite the significant risk of
adverse publicity..NFSP had reflected back.the.
concerns of their members at smaller offices’in
being asked to stay open when there were no
customers. The line was being held that for our
customer requirements to be met, Post Offices:
should remain open until 16:00;
OFT Complaint: The: OFT were considering a
complaint from the Association of Convenience
Stores concerning Post Office Ltd’s restrictions
. policy. The Board agreed that David Miller would
contact Nigel Leese to advise of the potential
significant impact on the franchise and brand.
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POLB04/127 'T REPORT POLB(04)104
(a) - The Board noted the report. The Board further noted:
(b) Chip and Pin: The release to introduce Chip and Pin and
replace the IBM Banking Engine was now deep into
implementation. Streamline and LINK accreditation and
certification having been successfully achieved. A Chip and Pin
pilot for retail (debit card) transactions had run successfully for
nearly three weeks. Software distribution to the network was
nearly complete. Migration of banking transactions to the new
Fujitsu engine from the legacy IBM engine was, underway with
the full load of LINK transactions being routed via Fujitsu.
Residual issues from testing meant that plans remained tight
but achievable;
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(C). Christmas Eve: Three days of POCA transactions would occur
. on Christmas Eve. Work was underway with Fujitsu ‘to.
understand how the system. would perform at extreme
transaction levels;
(d) Audit-of EDS / JPM Systems: the first phase of the audit
commissioned in the aftermath of the service problems on the
23rd August was now complete and the brief forthe second
phase.agreed. The.audit would now concentrate on the areas
of weakness identified during the first phase and would report
éarly in the New Year. The indications Wefe that the: service.
interruption occurred because JPM feared that the database
had been corrupted rather than there being hard evidence that:
corruption had occurred. Processes for escalation and
managing change were also lacking. No evidence had been
produced to show the-system had been unstable.
POLB04/129 ANY OTHER BUSINESS
(a) Alan Barrie: In recognition of his excellent sérvice to Post Office
Ltd.as IT Director, the Chairman presented Alan Barrie with an
inscribed picturé frame featuring four commemorative Scottish
Stamps. Alan Barrie thanked the’ Board ‘for the valuable
experience he had gained during his directorship at Post Office
Ltd.
POLB04/130 CLOSE
(a) There being no further business, the meeting was closed.
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