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POST OFFICE LIMITED BOARD MEETING
Strictly Confidential
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS OF POST OFFICE LIMITED HELD ON TUESDAY 25
SEPTEMBER 2018 AT 20 FINSBURY STREET, LONDON EC2Y 9AQ AT 11.30 AM
Present: Tim Parker Chairman (TP)
Paula Vennells Group Chief Executive (PV)
Ken McCall Senior Independent Director (KM)
Tom Cooper Non-Executive Director (TC)
Tim Franklin Non-Executive Director (TF)
Shirine Khoury-Haq Non-Executive Director (SK)
Carla Stent Non-Executive Director (CS) I
Alisdair Cameron Group Chief Financial and Operating Officer (AC)
In Attendance: Jane MacLeod Company Secretary (JM)
Veronica Branton Head of Secretariat (VB)
Owen Woodley CEO — FS&T (OW) (item 7)
Debbie Smith Chief Executive Retail (DS) (items 8, 9 and 10)
Martin Kearsley Banking Director (MK) (item 8)
Tom Moran Network Development Director (TM)
(items 8, 9 and 10)
Andrew Clatworthy Retail (ACL) (item 8)
Mark Siviter MD Mails & Retail (MS) (item 9)
Rob Houghton Group Chief Information Officer (RH) (item 12)
Apologies: None ACTION
1. INTRODUCTION AND CONFLICTS OF INTEREST I
a) A quorum being present, the Chairman opened the meeting.
b) 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.
2. I MINUTES OF PREVIOUS BOARD AND COMMITTEE MEETINGS INCLUDING STATUS
REPORT
The minutes of the meeting of the Board held on 31%tJuly 2018 were APPROVED and
AUTHORISED for signature by the Chairman.
3. CEO’s REPORT
a) Paula Vennells updated the Board on the following recent issues:
Post Office Limited is registered in England and Wales. Registered No, 2154540
Registered Office Finsbury Dials, 20 Finsbury Street, London, EC2Y 9AQ PostOffice.co.uk I
Post Office and the Post Office logo are registered trade marRagBok Offid Limited I
b)
c)
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ei
- Irrelevant
Irrelevant
The Board NOTED the CEO’s report.
FINANCIAL PERFORMANCE REPORT
The CFOO introduced the report and highlighted a number of issues:
© we were £4.7m ahead on EBITDA but expected this to reverse in the second half of
the year because of the cut in fees for Identity and the cost reductions in IT not
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coming through in the second half of the year. The latter was partly due to delays
in the Belfast exit negotiations. The parcels market had been resilient
© Travel money had underperformed against the plan; this was in part because of
period specific issues such as the extended period of warm weather and Brexit
that had affected the whole market but we were conscious of market disruptors
whose margins were minimal
e Insurance was not achieving the volumes or the returns planned in all areas. There
were some specific reasons: the difficult summer in travel and delays in Customer
Hub. A review of marketing efficacy was underway
¢ Telco was likely to miss its income targets but meet its trading profits. We would
be returning to the Board to discuss the longer term strategy for Telco. Pricing was
higher out of contract and was going to be increased, while we remained
competitive on in-contract pricing. The strategic work would consider a variety of
options including sales, partnering, removing Fujitsu and the product range.
A number of points were raised, including:
© The position on former agents’ losses was discussed. It was noted that we were not
bringing prosecutions currently where these related to the Horizon system because
of the ongoing litigation. The increase in cash in branches further increased the
risks. We had improved our ability to identify branches with potential fraud issues
and target them for audits. Prosecutions could potentially start again after the
Horizon Trial (assuming a positive outcome), however as matters go “stale” after c6
months, it is unlikely that we would be able to prosecute retrospective cases
© Security in branch and in the supply chain was discussed. Introducing CCTV in high
risk branches had been and continued to be considered but there were costs
associated with this. Analysis had been done to identify high risk branches but this
covered a range of factors such as a branch handling high volumes of cash;
however, the correlation between high risk indicators and the location of thefts and
fraud was not high in practice
© The physical management of cash in branches was going to be critical to the
business and it was thought that we should consider whether security provisions
such as CCTV were simply the cost of doing business. ATMs and closed cash systems
also formed part of this conversation on security measures and the safety of staff as
POs became increasingly the place to go for cash. It was reported that while we had
experienced health and safety improvements overall we had suffered a spate of
ATM rip outs. A Business case was being considered to roll out fogging devices to
many more branches. It was AGREED that an update on security measures would
be included in the Health & Safety Report to the Board. We needed to recognise
that this was an investment discussion where there was no immediate prospect of
return
«It was reported that a project was being run on closed cash where the safe and till
were combined. Feasibility and cost were key issues and to be achievable might
require co-funding from the banks. An approach to the banks on investment would
have to be considered very carefully as we were proposing a significant increase in
fees through Banking Framework 2. We might consider a segmented approach
where equipment such as closed cash cartridges could be deployed in the top
branches for cash, with cameras for other branches
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AC
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a)
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Our cash borrowing was discussed. We had made efficiency improvements in
branches on cash management but we were borrowing more than we had
expected.
The Board NOTED the Financial Performance Report.
FUNDING BEYOND 2021
The CFOO introduced the report and highlighted a number of issues:
* we were six months into a three year funding plan and would not normally be
starting a conversation about the period beyond that plan at this stage; however,
UKGI and BEIS were preparing for the anticipated Government Comprehensive
Spending Review and we wished to provide them with some sensible placeholders
notwithstanding the significant degree of uncertainty in our plans beyond 2021.
Our baseline assumptions were:
- we should not need substantial investment funding if we are achieving our
trading profit targets
- network subsidy would continue to be needed to keep unprofitable branches
open. Network subsidies were currently provided at around £50 m per annum
and we had to provide evidence of the costs required to meet the Services of
General Economic Interest (SGEI) set out in our Funding Agreement with
Government
- that we would need a borrowing facility.
* work was being done on the costs of running the unprofitable branches, our
IT costs, the cost of re-investment in the network and regulatory changes etc.
A number of points were raised, including:
e that there were a number of moving parts with IT transformation, investment
requirements for business developments such as Identity, the need for funding for
loss making branches but with the prospect of the EBITDA figure being significantly
higher with the increase in fees with Banking Framework 2
© we would need to consider whether we should be asking Government for a
contingency fund, how that conversation should be structured and the fund level
required
«that we could not expect indefinite funding from the taxpayer other than to run
unprofitable branches but that meant we needed to have the capability to borrow.
The preference would be to be able to access external funding. We needed to
consider our capital investment requirements, the returns we thought we could
get from these and any assets we might sell
¢ whether we should consider a symbolic drop in what we sought as the network
subsidy to show our intended direction of travel. It was noted that the reverse
argument was that inflation and the cost of managing cash in branches meant that
a £50m network subsidy was less in reality anyway and that there should be a fee
attached to providing an unprofitable service. To understand this better the Board
asked to see the costs associated with running the unprofitable branches.
The scope to retain the network subsidy but look at dividend payments was
discussed.
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AC/ DS
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c) The Board NOTED the Report and endorsed the proposed approach of having open
conversations with BEIS and HMT to seek longer term alignment around future
government support.
6. I
H I
a) i I
‘OW/ VB
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PEREGRINE UPDATE
OW provided a verbal update on the Peregrine negotiations. Bank of Ireland (Bol) had
held an investor day in June 2018 which had focussed on its cost reduction programme.
This had included a strategic review of its credit card operations in the UK. We had re-
started our negotiation process with Bol which would reach its final stage in October
2018.
Bol was claiming not to be making a profit on its joint venture with PO. Their figures
did not stand up to scrutiny and appeared to be a negotiating position rather than
genuine sharing. However, Bol was making less money than 18 months ago because
of the reduction in mortgage margins. We needed to know what their fixed costs and
average achieved margins were. We had always asserted that there was a mismatch
on FRES costs but Bol was now saying that there were several million pounds of
unallocated costs. Bol’s strategic intent did not appear to align with PO’s.
Bol appeared to be intent on selling its part of the credit card book. We would like a
better partner on credit cards but had always said this would be part of the wider
Peregrine negotiations. Bol had written to us to notify us of its intent to proceed with
selling its part of the credit card book. At this stage it was felt appropriate for PV to
meet with the Group CEO of Bol to get a clearer view of Bol’s real strategic position.
PV had met earlier in the day with the outgoing UK CEO of Bol. The view from this
discussion was that the new Bol negotiating team were trying to get up-to-speed. The
UK market was more dynamic than the Irish so Bol learnt from developments here
making the view that Bol was seeking to get out of the UK less credible. Failing to do
a deal with PO would force Bol to consider more niche parts of the UK market as
there was no credible replacement partner of our scale.
A number of points were raised, including:
¢ that the Irish economy was growing rapidly and it was feasible that Bol was
seeking to retrench in light of Brexit and its likely impact on UK economy
¢ that we should consider accelerating our work on “Plan B” in case the Peregrine
negotiations did not develop as we wished them to. Bol might be amenable to us
finding an alternative partner so a “friendly divorce” could be an option.
BANKING FRAMEWORK 2
The Chairman welcomed Debbie Smith and Martin Kearsley to the meeting. MK
introduced the paper and highlighted a number of issues:
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POST OFFICE LIMITED BOARD MEETING
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e Banking Framework 2 was seeking to appropriately charge the banks a commercial
rate for our services which reflected the true value that PO offers the banks as
they reduce costs arising from branch closures
© Anumber of variations to the original framework were being worked through. The
Framework Fee, transaction rates and Ad Valorem fee changes were being
proposed
«Issues regarding Automation, Balance Sheet funding and future cash volumes
impacting the Supply Chain were being work through by the team.
b) = Anumber of points were raised,
it was noted that Santander did not have a branch network for business customers
and this differentiated them from other banks
© we could consider transitioning increased tariffs over a period of time and should
factor in what charges the banks would be prepared to pay to secure certainty for
a longer period of time. However, it was noted that we had greatest leverage now
as the banks had not developed strong alternative networks and cash transaction
volumes remained high. The increased tariffs proposed reflected savings to the I
banks, our costs and investment requirements. It was also noted that the largest I
growth area was business deposits and these were the most timing consuming
and problematic banking transaction for us so it was reasonable for our proposed
tariff increases to focus on that transaction
e the specialist advice we had received was discussed. It was reported that KPMG
had advised us on the savings being made by the banks through branch closures
but not on our pricing proposals. Andrew Clatworthy had been recruited to lead
on the negotiations with the banks. It was suggested that it would be worthwhile
engaging another third party to test our thinking and proposals on the
negotiations, including how the banks might view our proposals Ds/ MK
* whether the banks were aware of the likely scale of the pricing changes. It was
confirmed that the banks were aware that the increases would be substantial and
that this was justified
* whether we had any red lines on the pricing. It was reported that the target rate
was viewed as a market sustainable rate.
c) The Board NOTED the report and supported the option of allowing the banks until 31.
March 2019 to confirm or terminate their inclusion in the Banking Framework 2.
Irrelevant
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12. BACK OFFICE TRANSFORMATION
a) The Chairman welcomed Rob Houghton to the meeting. AC introduced the paper and
reported that testing through TRANSAP was taking longer than through SAP. We had
considered carefully whether we could migrate off POLSAP and go live in November
2018. However, this would have disrupted the cash forecasting solution before
Christmas. We were confident that we could go live with the new system in January
2019 and that the training requirements would have been completed. The only
reason we would have considered migrating earlier, given the risks of doing so, would
have been experiencing deterioration in POLSAP. The cost of the work from Autumn
2018 to January 2018 was in the region of £10m and the incremental cost from
November 2018 to January around £2m.
b) — The Board noted that the work was necessary to the running of the business and
RESOLVED to APPROVE the additional £9.4m drawdown.
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b)
¢)
14.
b)
15.
15.1
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The number of points were raised, including:
© that we needed traction in the next year on the actions we had identified so clear
ownership of the policy was important
¢ whether we could audit our compliance with the MSA when our network was
predominantly operated by agents running their own businesses.
© that we should change the wording of the statement to refer to due diligence for JM
on boarding but not for the subsequent operation of the business
© whether we carried out subsequent checks when we visited agencies. It was
reported that there was a vetting check when PMs took on staff. In order to
access Horizon, those checks had to have been completed and included checking
that the individual was a real person and eligible to work etc.
© whether there was as retail consortium which produced a standard on modern
slavery which we could sign up to. It was noted this would be investigated
© that raising awareness through training was important. It was noted that we
would consider whether there was scope to strengthen our existing arrangements.
The Board RESOLVED to APPROVE the 2017/18 Modern Slavery Act Statement,
subject to incorporating the change agreed at the meeting, and endorse the proposed
actions for the business to take forward in the 2018/2019 financial year.
POSTMASTER LITIGATION (Confidential and subject to legal privilege)
JM updated the Board on the Postmaster Litigation. The first hearing for the Common
Issues would start on 5 November 2018. It was thought that the judgement was likely
to be published at the end of December 2018 or the beginning of January 2019. We
were preparing in parallel for the second trial on the Horizon system. Two experts
(one for each party) had been appointed to provide their view of the Horizon system
and had a series of questions to answer from the Judge. In effect the judge’s decision
would reflect which expert he believed.
We were preparing our communications approach and material. One Freelance
journalist was seeking crowd funding to be able to attend the trial.
Work on contingency planning was happening in parallel.
The Board NOTED the update.
ITEMS FOR NOTING
Sealings
The Board RESOLVED that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1697 to 1710 inclusive in the seal
register was confirmed.
Irrelevant
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15.3 Future Meeting Dates
The future meeting dates were NOTED.
15.3 Forward Agenda
The forward agenda was NOTED.
Meeting closed at 3.00 pm.
Chairman Date
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