POLB 17(3")
POLB 17/48 - 17/33
Strictly Confidential
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a meeting of the BOARD
held at 12.30pm on Tuesday 28" March 2017
Present:
Tim Parker
Richard Callard
Tim Franklin
Virginia Holmes.
Carla Stent
Paula Vennells
Alisdair Cameron
In Attendance:
Victoria Moss
Jane MacLeod
Kevin Gilliland
Nick Kennett
Jonathan Hill
Gary Fitton
Martin Edwards
Rob Houghton
Christian Muir
Tom Wechsler
Natasha Wilson
Apologies for Absence:
Ken McCall
Alwen Lyons
at 20 Finsbury Street, London EC2Y 9AQ
Chairman (TP)
Non-Executive Director (RC)
Non-Executive Director (TF)
Non-Executive Director (VH)
Non-Executive Director (CS)
Group Chief Executive (CEO)
Chief Financial and Operations Officer (CFOO)
Deputy Company Secretary (DCoSec)
General Counsel (GC) (Minutes POLB 17/22, 17/23 and 17/24)
Chief Executive Retail (KG) (Minute POLB 17/27)
Chief Executive Financial Services and Telecommunications (NK)
(Minutes POLB 17/25, 17/26 and 17/30(part))
Head of Financial Services Risk and Regulation (JH) (Minute
POLB 17/25)
Managing Director, First Rate Exchange Services Limited (GF)
(Minute POLB 17/26 (part))
Group Strategy Director (ME) (Minutes POLB 17/22 to 17/25)
Group Chief Information Officer (RH) (Minute POLB 17/28)
POca Procurement Lead (CM) (Minute POLB 17/27)
Government and Payment Services Director (TW) (Minute POLB
17/27)
Reward, Pensions and Performance Director (NW) (Minute POLB
17/29 (part))
Senior Independent Director (KM)
Company Secretary (CoSec)
POLB 17/18 INTRODUCTION
(a)
(b)
POLB, 28 March 2017
A quorum being present, the Chairman opened the meeting.
The Directors declared that they had no conflicts of interest in
the matters to be considered at the meeting in accordance with
the requirements of section 177 of the Companies Act 2006 and
the Company's Articles of Association.
The Board noted apologies from KM and CoSec.
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ACTION: RC
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MINUTES OF THE PREVIOUS BOARD MEETING INCLUDING
STATUS REPORT
(a)
(b)
(c)
The minutes of the Board meeting held on 31% January 2017
and the extraordinary meeting held on 8 March 2017 were
approved and the Chairman was authorised to sign them as a
true record.
Action POLB 17/09(k): in regard to the technology strategy
update and Fujitsu, RC reported that the Government had
a satisfactory relationship with Fujitsu and that he would
put RH in touch with the appropriate person in the Cabinet
Office.
The actions status report was noted as accurate.
CEO REPORT
(a)
(b)
(e)
(f)
POLB, 28 March 2017
The CEO introduced her report, focussing on the following key
points.
Financial Performance — Period 11
The CEO reported that the business was trading well to year
end and that the target for 2016/17 of an EBITDAS of (£10m)
would certainly be beaten. She was pleased to report this very
positive position, the first time in 15 years that the Post Office
would have an operating profit.
The CEO gave thanks and credit to all GE members for this
result but in particular commended the work of Martin Kirke who
had become HR Director late in the financial year but who had
delivered the necessary HR changes and set a high standard
with his own team.
Network Transformation
The CEO was pleased to report that with KG she had attended
the opening of the 7,000" branch. The branch at Wheatley in
Oxfordshire was a well performing branch, now in a good new
location.
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(g)
()
‘Irrelevant.
ACTION: KG
(k)
(m)
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(n) I >
* Irrelevant
(p)
Project Sparrow I
(q) The CEO confirmed that JM would provide an update on Project I
Sparrow when she attended for a later item on the agenda.
0) The Chairman thanked the CEO for her report. The Board noted
the report from the CEO.
POLB 17/21 FINANCIAL REPORT
(a) The CFOO presented the financial performance report for
period 11 2016/17. He confirmed that the performance ahead of
Plan that had been visible over the past few months had been
maintained and that the Bank of Ireland profit share had been
confirmed. He was therefore forecasting breakeven for 2016/17
on a like for like basis.
(b) The CFOO continued that accounting for the closure of the DB
pension scheme and Project Iris had been discussed by the
Audit, Risk and Compliance Committee on 28 March 2017. It
had been agreed that the prior year pension credit and the net
cost of the discontinued supply chain operation, neither of which
were in the management reporting, would both be accounted for
below EBITDAS. The detailed numbers were subject to audit.
(c) The CFOO reported that branch targets had been hit and that
the cashflow close to forecast. The Chairman queried the focus I
on the forecast comparison rather than with the budget. The
CFOO explained that through most of the year the variance
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analysis focused on budget and prior year. The additional focus
on forecast happened only towards the end of the year as it was
usually more informative. This was accepted.
(d) The CFOO continued that three products which had performed
consistently behind in 2016/17 were lottery, POca and
telecoms. There was very little to be done about lottery as
Camelot was aggressively driving sales online. POca was a
product in decline and more detail was presented later on the
agenda.
(e) Regarding telecoms, the CFOO reported that Ofcom had given
aruling on BT, enforcing a price reduction. Post Office currently
priced 10 per cent below BT on home phone which was the most
profitable product for telecoms. Strategic choices would be
presented in the summer.
(f) RC commented that HM Treasury was likely to question any
change around telecoms strategy versus the funding request
and care was needed around the communication of the
preferred position. While he supported proper exploration of all
options he emphasised the need to consider the government
position.
(g) CS stated that she had raised some concerns around the
acquisition of New Call, approved by the Board by
correspondence on 22 March 2017. Her concern had been
primarily around whether it was a strategic move but she had I
reached a position of comfort after receiving further information. I
The Board had agreed that the acquisition added value and
made the telecoms business more saleable.
(h) The Board noted the financial performance report for period 11
2016/17.
POLB 17/22 2017/18 PLAN, FUNDING AND CASTLE UPDATE (INCLUDING I
2017/18 INCENTIVES)
(a) The GC and ME joined the meeting. I
(b) The CFOO introduced the paper which addressed:
the proposed 2017/18 Operating Plan;
an update on EBITDAS expected outturn; I
planned capital and investment spend;
proposed business scorecard;
proposed STIP targets;
the current status of funding discussions; and I
implications should investment funding not be received to I
the requested level.
eee reese
2017/18 Operating Plan
(©) The CFOO noted that the paper summarised the key I
components of the Operating Plan for 2017/18 and noted the
following updates:
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¢ change activities were not progressing as quickly as had
been anticipated and these were being reviewed. The
Chairman stated that the overall shape of the Plan should
remain and emphasised the need to continue to focus on
costs pending delivery of planned growth in financial
services performance.
e Funding discussions were ongoing with the Shareholder
and the Plan assumed full funding, although it had been
reviewed to determine which elements could be stopped.
The CFOO noted that the elements easiest to stop were
those which supported the growth strategy which would
take Post Office to a position of sustainability. The Board
emphasised that the Shareholder needed to decide I
whether it wished the Post Office to grow to sustainability, I
as the consequence of short term affordability would be that
Post Office would require funding over a longer period. It
was also noted that a sharp decline in the business after I
three or four years was inevitable without adequate I
investment. RC confirmed that those messages were being
communicated and emphasised to government. Cross
governmental buy in was required, ME confirmed that a
meeting with the Secretary of State would take place later
that day.
(d) The CFOO noted that the major commercial opportunity over I
time to drive revenue was in identity services. i
(e) During discussion the following points were made:
« the need to monetise the value of the Post Office brand, for
example with Bank of Ireland;
« the need to review options to increase telecoms revenue;
« Management would consider how best to undertake
work to consider locality plans, related remuneration,
valuation of the Post Office franchise and an
ACTION: ME understanding of the footfall equation.
« the 2017/18 Plan included franchising of 37 directly
managed branches (DMBs); discussions were underway
with Ryman which could increase this number.
« the CFOO reminded the Board that £10m had been
allocated for a ‘growth fund’, however, dependent on the
current negotiations, this might be required to support POca
or other challenges.
* Growth plans for Post Office Management Services Limited
(POMS) were under review. The CEO committed to
provide the Board with a further update on POMS’
ACTION: NK longer term plans.
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« The CFOO informed the Board that Steve Ashton
(Chairman of POMS) and NK (POMS CEO) had raised
concerns that the marketing provision by Post Office to I
POMS through the Master Services Agreement had not
been reaching the required standard. It was hoped that
actions now put in place would bring improvements. It was
also noted that Fintech developments were changing the
nature of the financial services marketplace and that Post
Office needed to understand these developments.
EBITDAS
(f) The CFOO noted that in January 2017 the Board had approved
and EBITDAS target of £28m for 2017/18 and that although
there had been minor changes to a number of components of
the Plan, including timing of New Call, delays to Peregrine
negotiations and expected Sparrow costs, the £28m EBITDAS
target still looked appropriate. However it had also been
discussed that the Board recognised the headwinds on income
and would support an on target bonus performance, as
discussed in January at £19m.
(g)
Funding Update
0) The Board noted the update on Project Castle set out in the
paper and the potential implications for the 2017/18 Plan. The
CFOO reminded the Board that its approval of the 2017/18 Plan It
was required to allow BEIS to release the £140m of network
subsidy and investment funding due in April 2017. If funding
was very different from what was expected there might be a
need to amend the Plan.
(k) The Board approved the financial and operating plans for
2017/18 and confirmed the proposed STIP targets with the shift
to £19m as set out above.
POLB 17/23 APPROVAL OF FUNDING AGREEMENTS
(a) ME introduced the paper which set out the current position with
the funding documentation to give effect to the approval from
BEIS of funding totalling £110m, comprising the network
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subsidy funding for 2018/19 and 2019/20 as well as the
extension of the £950m ‘working capital’ facility through to
March 2021. It was expected that these documents would be
signed before 31 March 2017 which would assist the Board in
satisfying the rolling 12 month look forward test for going
concern for the purpose of the audited accounts and the view
on the financial certainly of Post Office.
(b) ME noted that the requirements were substantially the same as
the previous arrangements, however, there was some
additional flexibility to recognise the ongoing funding
uncertainty.
(c) In particular, the contractual requirement for a minimum number
of branches (which remained at 11,500) had been changed to a
shareholder expectation which would be _ set out in a letter to
the Chairman and the requirement for development of
mutualisation plans had been removed.
(d) ME advised that it was expected that investment funding would I
be finalised by the end of May 2017, however, if this was
delayed or changed significantly, it would create significant
challenges for the State Aid funding process which needed to
start in early June 2017. The CFOO continued that as more
clarity emerged on investment funding there might be a need to
reconsider the investment strategy.
(e) Regarding the matter of Post Office being a going concern, CS
confirmed this had been discussed in detail at the 28 March
2017 meeting of the Audit, Risk and Compliance Committee.
She explained that with the recently confirmed network funding
and working capital there was sufficient funding to give certainty
to the going concern assessment for the next 12-18 months.
() RC confirmed the Government's agreement to sign the funding
documentation subject to minor final amendments.
Management was requested to email the Board to confirm
ACTION: GC when signing had taken place. The Chairman thanked RC for
his contributions.
(g) The Board:
1. noted the timetable for agreeing the Funding Documents;
2. approved the terms of, and the transactions contemplated
by, the following draft documents:
i. Funding Agreement between the Secretary of State
and Post Office Limited contemplating a total of £110m i
network subsidy payments for 2018/19 and 2019/20 t
(the ‘Funding Agreement’); I
ii. Entrustment Letter being a letter from the Secretary of
State for the Department of Business, Energy and
Industrial Strategy addressed to Paula Vennells as
Chief Executive Officer of Post Office Limited and
headed ‘Entrustment of Post Office Limited with the
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Delivery of Certain Public Services’ (the ‘Entrustment
Letter’); and
iii. the Deed of Amendment relating to the Post Office
Limited £950m Credit Facility Agreement between Post
Office Limited and the Secretary of State for the
Department of Business, Energy and Industrial
Strategy;
(together: the ‘ Funding Documents’)
3. noted the terms of the “Chairman’s’ letter being a letter from
Mark Russell, Chief Executive of UK Government
Investments addressed to Tim Parker as Chairman of the
Board of Post Office Limited;
4. resolved to execute and perform each of the Funding
Documents;
5, authorised any director or Authorised Signatory to execute
each of the Funding Documents on behalf of Post Office
Limited; and
6. authorised any director, Authorised Signatory or the
Company Secretary to sign and/or dispatch all documents
and notices to be signed and/or dispatched by it under or in
connection with each of the Funding Documents.
POLB 17/24 SPARROW UPDATE
(a) The GC provided a verbal update on Sparrow.
(b) The GC explained that the group litigation order was heard in
January 2017 and the order had been signed in the week I
beginning 20 March 2017. Accordingly there would be further
advertising by Freeths in order to advertise that Postmasters I
could apply to join the litigation group and therefore it was likely
that there would be further adverse press. Postmasters had I
until the end of June 2017 to apply to join the action. I
(c) The General Particulars of Claim were expected imminently I
which would set out in more formal terms the legal basis of the I
Postmasters’ claims. Following receipt of that document, Post }
Office would have until the end of June 2017 to prepare and file I
its Defence. Subsequently, there would be a case management
conference (expected to be in October 2017) at which the Court I
would determine how the claim should proceed thereafter. I
(d) The GC noted that there was still no quantification of the
Postmasters’ claims.
(e) The Board noted the verbal update on Sparrow and thanked the
GC.
(f) The GC left the meeting.
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POLB 17/25 FS GROWTH AND UDATE ON PEREGRINE
(a) NK and JH joined the meeting.
(b) NK introduced the paper which provided the Board with an
update on the Post Office Money strategy, including the
incubator activities and proposed approach.
New Normal
(c) NK reported that the ‘new normal’ customer positioning was in
use for mortgages and for some of the insurance products
delivered by Post Office Management Services Limited
(POMS).
(d)
Falcon
(e) In relation to Project Falcon, NK confirmed that the world of
fintech was moving extremely fast. His team was taking a
strategic check of all different models and options and it had I
been confirmed that Post Office building its own solution was
not feasible. A number of fintech providers had been engaged
with in the assessment of the range of solutions and options to
deliver the ‘Strong Integrator’ model.
(f) Initial due diligence was being completed and NK would
return to the Board with a concept for consideration in June I
ACTION: NK 2017.
(g) NK explained that in order to deliver the Post Office Money
strategy, it was likely that regulatory permissions as a principal
firm would be needed from the FCA and this would be better
positioned via a regulated subsidiary, as with POMS, than for
Post Office to become a regulated principal firm.
POMS
(h) NK confirmed the current figure for general insurance policies
as around 1.2 million, half of which were travel policies. NK
confirmed that POMS’ FCA licence allowed the Company to I
underwrite customer risk and this had been anticipated in long
term planning. He added that to commence underwriting the
Post Office Board, as well as the POMS Board, would need to
approve the change in strategy and risk appetite.
(i) As part of the long term financial services strategy, this
potential future move into underwriting activities would be
brought to the Board for further discussion at the
ACTION: NK appropriate time.
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Mortgages
(i) NK confirmed that figures on mortgages had improved, with
February 2017 being the best performing month in the financial
year. However, February's numbers were still less than those
seen 18 months previously and remained less than the level
required. NK assured the Board that improvement was
anticipated with the launch of the new product structures and
with a focus on specific customer segments.
(k) The Board noted the progress with the Post Office Money
(Il) ME and JH left the meeting.
POLB 17/26 FRES BUSINESS UPDATE AND STRATEGIC OVERVIEW
@ I
(b)
(c)
(d) The Chairman welcomed GF to the meeting and noted
apologies from Gordon Gourlay, FRES CEO.
(e) I GF explained that his presentation would provide an update and
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review of FRES performance together with a strategic overview.
Foreign exchange was what Post Office was known for after
mails and he reminded the Board that trading had begun in the
1990s with the arrangement formalised with FRES in 2002
under a Joint Venture Agreement (JVA).
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(h)
(i)
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POLB 17/27 POCA
(a)
(b)
(c)
(e)
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GF gave the Board a demonstration of the new multi-currency
travel money card, which could hold 13 different currencies on a
single contactless card. The website had been built and was
run in house and had migrated one million customers. Real time
identification had been enabled, ahead of the fourth money
laundering directive.
The Board noted the update provided on FRES.
NK and GF left the meeting.
KG, CM and TW joined the meeting.
KG introduced the paper which set out the current position with
the procurement to select new POca suppliers and the current
contingency recommendation to indefinitely extend the current
contract and negotiate commercial terms under that contract.
KG continued that the existing contract Post Office had with
suppliers to provide POca was due to expire in April 2017 and
no bank had expressed interest in becoming a supplier. JP
Morgan (JPM) was the current provider and was obliged by the
regulator to continue to provide services to POca customers.
The Chairman noted the detailed negotiations and advised that
KG and his team should be as firm as possible in pushing the
Post Office's favoured position as negotiations continued. He
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(g)
(h)
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questioned whether the amount paid to Postmasters could be
reduced.
The Board discussed the possible future options for POca,
including: ATM functionality; basic bank accounts; and the digital
wallet developments.
The Board noted the update on POca and delegated authority
to the Group CEO to give notice to extend the current POca
contract with HP Enterprise Services indefinitely.
KG, CM and TW left the meeting.
POLB 17/28 IT NETWORKS PROGAMME UPDATE
(a)
(b)
(c)
(d)
(e)
RH joined the meeting.
RH introduced the paper which provided an update on the IT
networks programme and asked the Board to approve the
changes to cost and savings as agreed at the ESG or Group
Executive. He explained that Board submission was required
as the scoping change fell outside the ten per cent tolerance
level. He confirmed that there was no viable alternative to the
proposal presented.
The Board approved the changes to the IT transformation
programme’s changes to cost and savings as agreed at ESG or
Group Executive, to bring the total investment spend to £31.9m
with annual operational cost savings of between around £2.3m
to £2.9m.
RH left the meeting.
The Board was pleased to note its confidence in RH and the
great progress being made with the IT transformation
programme.
POLB 17/29 BOARD COMMITTEE CHAIR VERBAL UPDATES
(a)
(b)
ACTION: CoSec
(c)
(d)
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Audit, Risk and Compliance Committee (ARC)
It was noted that all Board members other that VH had been at
the ARC, and were therefore aware of the matters discussed. It
was agreed that CS would brief VH separately.
It was agreed that going forwards VH should be provided
with the ARC papers for her information.
Remuneration Committee
In KM’s absence, NW joined the meeting to provide an update
on remuneration.
NW reported good progress with the executive remuneration
strategy which KM had submitted to Margot James, Under
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Secretary of State for Business, Energy and Industrial Strategy.
She thanked RC for his assistance and he confirmed that the
remuneration arrangements for 2016/17 had been signed off.
(e) The design principles for 2017/18 were in final stage and
now required Remuneration Committee approval. Since the
next meeting of the Committee was scheduled for May, the
ACTION: NW/ Board agreed that this approval could be sought be
CoSec correspondence.
(f) NW left the meeting.
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ACTION: Martin I i
Kirke I
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POLB 17/32 ITEMS FOR NOTING
(a)
(b)
I
ACTION: GC
(9)
ACTION: CoSec
(h)
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Committee Terms of Reference Reviews
The Board noted that the Nominations, Remuneration and Audit,
Risk and Compliance Committees had reviewed their
performances against their respective Terms of Reference. No
gaps had been identified and no changes were currently
proposed.
Register of Sealings
The Directors resolved that the affixing of the Common Seal of
the Company to documents numbered 1483 to 1501 inclusive in
the seal register was confirmed.
Meeting Dates and Forward Agenda for May 2017
The Board noted the future meeting dates and proposed Board
forward agenda.
The Chairman asked for the timing of the meetings of the
Board and its Remuneration and Nominations Committees
on 24 May 2017 to be amended. The committees to be held
between 9.00am and 10.20am to allow for the Board to begin
at 10.30 for a finish by 4.00pm.
Proposed Board and Committee Dates for 2018
The Board noted the proposed meeting dates for the Board and
its committees in 2018.
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ACTION: All/ (i) Directors were asked to contact CoSec if any dates were not
CoSec convenient and for CoSec to amend dates as necessary.
POLB 17/33 ANY OTHER BUSINESS
(a) There being no further business the Chairman closed the
meeting at 3.50pm.
Chairman
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