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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 30
OCTOBER 2018 AT 20 FINSBURY STREET, LONDON EC2Y 9AQ AT 11.45 AM
Present: Tim Parker Chairman (TP)
Paula Vennells Group Chief Executive (PV) I
Ken McCall Senior Independent Director (KM) I
Tom Cooper Non-Executive Director (TC) I
Tim Franklin Non-Executive Director (TF) I
Shirine Khoury-Haq Non-Executive Director (SK)
Carla Stent Non-Executive Director (CS)
Alisdair Cameron Group Chief Financial and Operating Officer (AC)
In Attendance: Veronica Branton Head of Secretariat (VB) I
David Cavender Qc (DC)
Andy Parsons Womble Bond Dickinson (AP)
Debbie Smith Chief Executive Retail (DS) (items 6 & 7)
Cathy Mayor Finance Director — Retail (CM) (item 6)
Martin Kearsley Banking Director (MK) (item 7)
Rob Houghton Group Chief Information Officer (RH) (item 9)
Apologies: Jane MacLeod Company Secretary (JM) ACTION
1, INTRODUCTION AND CONFLICTS OF INTEREST
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.
2. MINUTES OF PREVIOUS BOARD AND COMMITTEE MEETINGS INCLUDING STATUS
REPORT
The minutes of the meeting of the Board held on 25"" September 2018 were
APPROVED and AUTHORISED for signature by the Chairman.
3. POSTMASTER LITIGATION - Strictly confidential and subject to legal
privilege
The Chairman welcomed David Cavender QC and Andy Parsons from Womble Bond
Dickinson to the meeting.
David Cavender provided an update on the case. We had lost our application to limit
the evidence being presented at the trial to the common issues. This judgement was
discussed and it was noted that during the trial we would politely but persistently
challenge the claimants’ cases where there were inaccuracies or contradictions.
Andy Parsons provided an update on the second trial on the Horizon system. The I
claimants’ IT expert had found that Horizon was not a robust system but this I
assessment was founded on identifying a large number of small problems with the I
system which our expert was confident could be rebuffed. I
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
Post Office and the Post Office logo are registered trade markPag@d Offi Limited
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CEO’s REPORT
Paula Vennells updated the Board on the following issues:
© we were about to enter our peak season and weekend training sessions were
being run for our agents
© the Edgware deal to franchise 73 DMBs into WH Smith branches had received little
coverage so far; however, we did not assume that this would remain the case.
Some of the branches we would be franchising were marginally profitable and in
some areas there was vociferous opposition from members of the public, local
MPs and the unions. We had considered our messaging again but did not want to
give too much oxygen to the debate. Our strategy remained the same as we knew
that franchising these DMBs, including those generating some profit, would
produce higher trading profits, which we needed to be a sustainable business I
which could still deliver its social purpose
© the branch IT transformation was complete - except for one branch on a Scottish
island. (Post meeting note: now completed.)
* we were focussing on the Postmaster litigation with the trial starting next week
* PVand OW had met with Francesca McDonagh (FMc), Group CEO of the Bol, and }
Mark Spain, the Chief negotiator, on 23 October 2018. Bol were very keen to I
agree a deal and not proceed down an “amicable divorce” route. The UK
remained an important market for Bol. We had raised exclusivity and areas where
we would like that to be lifted. Bol was reducing its cost base and wanted to exit
the credit card market. BOI had raised wanting to end the provision of current
accounts two days before our meeting. We expressed concern at this approach,
first because this discussion should form part of the main negotiation and second,
because Bol should be consulting us properly. Many of the customers to whom
we provided current accounts were elderly or vulnerable and from a customer
service and reputational perspective any change in provision needed to be
considered carefully. Their proposal on current accounts was subsequently
withdrawn. FMc stated she viewed Fres as an important business and recognised
the need to invest in it
* PV had met with Rico Back, the Group CEO of RM. The conversation had been
productive. RM was developing predominantly as a parcels business. RB was
very positive about the PO and did not wish to change partner. PV and RB agreed
that we needed to show the two brands together more often as confusion
between the two persisted. PV and RB agreed that our teams should work
together closely. RB was receptive to the idea of opening up Click and Collect so
that PO could allow other providers to collect parcels for delivery from branches.
PV had also met the new interim Chairman at RM and he had suggested a
Chairman and CEO dinner
e the All Party Parliamentary Group for PO has been reconvened. The Group was
supported by Lord Arbuthnot of Edrom
© the first Post Office People awards were taking place on 8 November 2018. A brief
would be circulated to the Board about the awards which were to celebrate PO
employees across a range of categories. Dates for PO Leadership events would
also be sent to the Board.
The Board congratulated the executive on PO Customer Hub winning its first digital
innovation award for the fastest go-to-market app.
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b. The Board NOTED the CEO’s report. I
5. FINANCE
Financial Performance Report
a. Al Cameron introduced the report and highlighted a number of issues, including:
¢ we had just finished the 6+6 plan which was coming slightly ahead of plan. PO
Insurance was suggesting it would hit plan but we were holding a £1m reverse as it
included a very strong Q4 recovery
© Telco customer numbers had increased during the period but were still behind
plan
* the second half would see some reversal of profit versus budget, with the fee cut
for Verify impacting us from P7 and IT cost savings being achieved later than plan
* the Group Executive had discussed the 2019/20 plan. There were many elements
of uncertainty including the outcome of the Postmaster litigation and the
negotiations with Bol. We had a strong focus on the costs base and ensuring we
got value from the change plan.
b, A number of points were raised, including:
«that it is was generally hard to deliver returns from growth initiatives but that there I
were still significant cost saving opportunities
* RM was seeking to reduce its cost base and we needed to be aware of that
throughout our negotiations, including the possibility of them seeking a signing-on
fee. It was reported that Oliver Wyman had produced a pricing analysis for us on
the banking framework and we would being seeking their advice on pricing for the
RM negotiations. It was recognised the we had to focus on how we could offer
benefits to RM which also benefited Post Office
© whether we had been expecting too much from PO Insurance in the short term and
whether we were investing enough in the business? The performance of PO
Insurance was high on PV’s agenda and she would discuss the strategy further with
Tim Franklin.
c. The Board NOTED the Financial Performance Report.
UKGI Quarterly Funding Report
AC introduced the change plan by saying that we were working with UKGI to finalise
it. He confirmed that the £50m from earlier in the year had been received and I
thanked UKGI for its help. In Q2, we appeared to have spent more than forecast. AC I
had reduced the change forecast by almost £20m based on previous experience. The I
remaining variances were mostly timing differences although there were exceptions,
for example back office transformation, where we had overrun. In these instances we
could have spent less if we had been prepared to accept more risk but this had not
been deemed appropriate. We were still forecasting £39 m of benefits out of a
forecast £40 m for the year.
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A number of points were raised, including:
that not enough information was included in the report currently to allow the
reader to understand sufficiently the thought processes behind the figures and the
business cases coming through
that where there was uncertainty about timings for the delivery of projects this
needed to be clearly understood
AC and TC agreed that we needed to make the processes work better. Currently a
significant amount of time was spent on briefings and producing papers. We
needed to stand back and determine how to put the most effective process in
place
The requirements for the report were discussed and a number of points made:
we needed a business planning approach rather than a financial variance report
we should look at the quarter and the year and it would be helpful to have a
clearer view of the next quarter’s spending
a business commentary on the larger projects would be helpful. For example, if
there was an overspend in Q3 including an analysis on whether we anticipated
being back on track by the end of the financial year
that to deliver the projects proposed over a 3 year period we would either need to
access more investment or decide not to proceed with some projects; this meant
that the prioritisation debate was timely
that we needed to resolve the position with the current report to UKGI so that
BEIS finance had sufficient assurance to release the funding. The assurance still
required was discussed. TC reported that BEIS still needed to better understand
the £20m deduction for the last quarter. The internal audit work could help in
understanding how we were tracking the numbers and assuring ourselves on the
figures. The internal audit report and the timing of the report were discussed. The
proposal had been to present the report to the Audit Committee in January 2019
but the report field work should have been completed by the end of November
2018. It was noted that the internal audit report would not provide any resolution
on the numbers we had presented. TC reported that UKGI and BEIS viewed the re-
prioritisation work as essential. Reassurance needed to be provided so the PO
could remain within the 3 year £350 m deal. BEIS finance might not be prepared to
release the funding until early next year so work was still needed on how to
resolve this position.
The Board APPROVED the report, giving delegated authority to AC to make any final
amendments, working with UKGI.
RETAIL PERFORMANCE REPORT
Debbie Smith and Cathy Mayor joined the meeting. A number of issues were
highlighted:
PO Retail performance was good in the context of the high street generally. No
further profit upsides were anticipated in the current financial year
the Payzone acquisition had been completed successfully. DS and Andrew
Goddard had visited the Payzone Team in Northwich last week. The Team was
enthusiastic about joining PO and were energetic and ambitious. DS and AG had
also visited three Payzone agents and had been impressed by each retailer and
their retail offering. PV was to visit before the November Board
the Edgware deal had been completed successfully
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work had continued on the Retail Strategy
only one branch still to go through branch transformation
Amanda Jones was taking over the running of the network and would be seeking
to maximise Christmas performance. Training and communications for the
Christmas period were in place.
A number of points were raised, including:
whether we had managed to retain the key people in the business. It was
confirmed that we had, including the commercial director who had set up the
original bills payment business at Post Office
that the figures for Lottery appeared to have declined over a period of time. It
was confirmed that there was an overall decline but that rollovers led to spikes in
volume and made the returns hard to predict. Camelot had a refreshed strategy,
including a defined timeline for rollovers. We also sold tickets for the Health
Lottery. Gambling was moving online increasingly and lottery tickets were one of
our lowest margin products. It was AGREED that a note would be circulated on
the lottery market
it was AGREED that a note would be circulated on the options we were looking at
for POca
whether DHL Parcel was likely to become a big domestic player and could make
use of the PO network? It was AGREED that more analysis on competitors would
be included in the next Retail performance report
the position with our partners. It was reported that McColls were taking on new
branches but that the Co-op was reporting that it was not generating profit
through operating POs. It was noted that the convenience market was set to grow
by £44m over the next few years so we needed to tap into this growth and
recognise it as a source of potential agents
that there had been a discussion on WH Smith compliance figures at the ARC
meeting earlier in the day. It was AGREED that it would be helpful to comment on
this in future Retail Performance Reports and link this through to customer service
figures.
The Board NOTED the Report.
FUTURE OF CASH ~ BANKING FRAMEWORK 2
Martin Kearsley joined the meeting and introduced the report:
under the existing Banking Framework we could re-price for a 3 year period
starting in January 2019. The contract only provided a termination right. Our QC
had advised us that any features in the current framework could be flexed as
required. We had the ability to phase changes in pricing
Lloyds had switched from paper transactions to electronic transactions recently.
Lloyds’ customer transactions in POs had increased by 63% last week and that
trend was continuing this week
we were focussing on cash in and cash out of branches to make our processes as
efficient as possible; however, we would need additional balance sheet funding
from 2022. We had started discussions with the major five banks about balance
sheet funding. A meeting had been scheduled with the Chief Cashier of the Bank
of England to discuss our balance sheet requirements given the volume of banking
activity forecast
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© our proposals on pricing for Banking Framework 2 were expected to add £870 per
branch, per year to PM remuneration (although this figure would be subject to
further analysis). Potentially, this was an increase from 37p to 80p per transaction.
Agent remuneration was a wider question which would be considered as part of
the Retail Strategy.
e Oliver Wyman had carried out modelling work to test and challenge our original
Rate Card design. We wished to increase our fixed fee significantly as this would
assist the longer term sustainability of the provision of banking services through
the Banking Framework. We wanted to balance increases across the relevant
constituents and were seeking to align with the banks’ governance systems by
providing them with the new pricing proposals at the end of November 2018 but
not requiring a decision until the New Year
e SME cash deposits were about 25% of our total volume of banking business. Our
current transaction charge was £1.39 while the banks were charging between £5
and £7 per transaction. The banks had a nil charge for most personal customers
* we provided cash based transaction and electronic payment services for our SME
and corporate customers
«there had been an acceleration in bank branch closures over last few years.
Barclays and Lloyds were behind this trend and would be making significant
savings through branch closures in the next period
e the banking hubs were the only potential alternative provider of scale currently;
however, at present the banking hubs appeared to be keen to work with PO co-
operatively. The banking hubs charged £4.50 per transaction and Oliver Wyman
had been analysing this pricing
« we had gained confidence in our pricing figures from the testing work we had
undertaken and external validation of our figures. We had no planned
negotiations following the pricing announcement but we could accommodate this
depending on the banks’ reaction. We would much prefer to retain all the banks
but could choose not to provide service to a bank which was not prepared to pay
the higher fee
our view was that cash transactions would peak and if the banks were to develop
an alternative to the PO banking provision now they would be investing in a
declining market. The Banks might wish to test our nerve, could raise legal
challenges and could raise the proposed fee increase with Government; however,
the banks were aware that a significant fee rise was justified and Government
supported a fair deal for PO which would support the PO network. The pricing
analysis produced could only support our case
© our approach over the next 6 months would be to be tough but pragmatic. The
Rate Card would apply to all the banks. We would continue to have balance sheet
conversations with the larger banks. We were having meetings with the bank CEOs
and they understood the value the PO service brought to them
¢ the next steps were to work through Rate Card and options. We would adhere to
the timelines set out, including issuing the pricing proposals to the banks at the
end of November 2018.
A number of points were raised, including:
© whether all banks would pay the fees associated with the existing framework until
the end of the Banking Framework 1 period? It was confirmed that this was the
case
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whether we knew what Paypoint were charging Link? It was reported that we did
not have that information; however, the service being offered was as an
emergency service rather than a reliable business service
that the management of Santander would be a key issue because of the volume of
transactions that come through them and as they would be hit hardest by the fee
increase. It was reported that we were working hard to make sure that the
proposed pricing structure was sensible taking the Santander position into account
whether we had looked at what was needed to fund the network and whether a
bank contributing to this could benefit from a fee reduction? It was reported that
the Banking Framework worked on a single rate framework and that changing this
to provide discounts could be seen as changing the contract. However, this did
not prevent us having investment conversations with the larger banks outside of
the Banking Framework
when we would have a reasonable indication of which banks would sign up to
Banking Framework 2? It was reported that the conversations with the banks to
date had focussed on operational issues, such as how we could help them meet
their money laundering obligations in Banking Framework 2. The banks were
aware that there would be a significant fee increase. The decision of the largest
three or four banks to participate in Banking Framework 2 would influence the
other banks.
The Board NOTED the Report and APPROVED delegation of the finalisation of the Rate
Card and its issue to the banks to the Chairman, Group CEO and Group CFOO.
It was AGREED that a separate session on Banking Framework would be scheduled on
the afternoon of 26 November 2018 (the day before the Board meeting). (Post-meeting
note: this has since been superseded by a Board call on Monday 19" November 2018.)
LEGAL ENTERPRISE OPTIMISATION (LEO)
The Board discussed the report and TC noted that UKGI would want to discuss further
where FRES sat in the structure and approach of leaving Telco as a business line rather
than creating a subsidiary. The capital reduction costs would also need to be discussed
further.
The Board APPROVED:
© the creation of the HoldCo above Post Office Limited, and transfer of PO Insurance
and Payzone BP, noting that further approval would be sought before
operationalising the new structure, e.g. transferring / restructuring employees,
assets, governance, subsidiaries etc.
in principle; the proposed Legal Entity Structure and associated costs
the detailed planning of Phases 4 & 5, with an exception of further approval prior
to their execution.
BELFAST EXIT PLAN BUSINESS CASE
The Chairman welcomed Rob Houghton to the meeting and he provided an overview
of the proposal:
the Belfast Exit Plan Business Case was linked to the broader Everest deal with
Fujitsu through which were we seeking to reduce our opex and replace this with
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capex, including migration to the cloud and digital development. RH was
comfortable with the costs we would be committing to until January 2019 but
thought the overall cost estimates were high - even accepting that we were paying
a premium with Fujitsu
© the Board’s approval was sought on the next phase of the migration so that we
could move some elements onto the Azure cloud
e staying with Belfast would entail data centre refresh costs and would not allow us
to move to a consumption based operating model so this approach had been
rejected
* the strategy we were proposing was viewed as the right one given our current
contractual position.
A number of points were raised,
© what was the cost risk if Fujitsu proved unable deliver? It was reported that we
had two principal ways of mitigating the delivery risk. 1) we were putting in place
a strong team internally to oversee the delivery and were getting external help
from the Hewlett Packard Enterprise to obtain an accurate view of Fujitsu’s build
costs. 2) we would seek a fixed price for elements of the delivery. RH reported
that he had interviewed and assigned the new project director for the Fujitsu team
and was bringing in a senior architect and an individual with strong Azure cloud
experience.
© that we had no option but to do this work and the operational risk we carried
today with a fixed data centre would reduce as we moved to the cloud.
The Board:
«@ APPROVED the drawdown of a further £6.7m of funding for the Belfast Exit Plan
and NOTED an ultimate Programme financial commitment of c£38-46m
© SUPPORTED the strategy of engaging Fujitsu to migrate from their fixed Belfast
data centre to a managed Microsoft Azure cloud infrastructure and AGREED that
the alternative options described in the paper should not be pursued.
CONFLICTS OF INTEREST POLICY
The Board:
¢ APPROVED the Post Office Group Conflict of Interest Policy
e¢ APPROVED the alignment of the policy review and controls review of the register
of interests in March 2019.
TERMS OF REFERENCE REMUNERATION COMMITTEE
The Board APPROVED the revised Terms of Reference on the recommendation of the
Remuneration Committee.
CONTRACTS
The Board RATIFIED its decision to APPROVE the new media buying contract with
Manning Gottlieb with a value of £71.25m over the term of 3.5 years (minimum 2
years, option to extend for a further 1.5 years).
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13. ITEMS FOR NOTING
13.1 Sealings
The Board RESOLVED that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1711 to 1728 inclusive in the seal
register was confirmed.
13.2 Health and Safety
The Health and Safety report was NOTED.
13.3 Future Meeting Dates
The future meeting dates were NOTED.
13.4 Forward Agenda
The forward agenda was NOTED.
14, ANY OTHER BUSINESS
It was reported that the FCA had been focussing keenly on operational resilience. The
FCA regulated PO Insurance but HMRC regulated PO Limited in relation to money
laundering requirements.
The meeting closed at 3.00 pm.
A208
Chairman
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