4.13 From September 2007 onwards, the Treasury and other members of the Tripartite, bought in specialist legal and financial advice from a number of external sources (Figure 17 overleaf). These advisers brought a range of commercial experience and specialist expertise that would not ordinarily be available within the Treasury, and played a significant part in helping the Department to find a solution for Northern Rock. External advisers continue to assist the Department in overseeing the taxpayers' interest in Northern Rock whilst it remains in public ownership.
4.14 The cost of professional advice has so far totalled just under £27 million, including fees which have been agreed but are yet to be paid. This total excludes £39 million spent by the former Northern Rock management team on professional advice in reviewing its options and the search for a private sector solution. In addition, the company paid bidders' costs totalling £13 million. With Northern Rock in public ownership since February 2008, all the advisory and bidding costs have ultimately been borne by the taxpayer.
4.15 The Treasury used a variety of approaches to recruit the expert advice it needed. Slaughter & May was appointed in September 2007 using a centrally determined framework agreement negotiated by the Office for Government Commerce. The framework agreement process requires potential suppliers to compete for a place on a list of approved suppliers. The framework agreement with Slaughter & May specified an hourly rate as a guideline but allowed it to be flexed depending upon the circumstances, for example the technical demands of the project. To take account of the particular demands presented by Northern Rock, including the need for on-call advice, the Treasury agreed to a 15 per cent uplift to these rates.
17 | Advisers to the Tripartite Authorities |
| Scope of work | Fees to 28 February 2008 (£m) | Fees from 1 March 2008 (£m) |
Slaughter & May | Strategic commercial legal advice and drafting of legal agreements | 6.1 | 3.3 |
Goldman Sachs | Analysis of private and public sector options and market advice | 3.8 | 1.0 |
Ernst & Young | Advice on the financial position of Northern Rock, monitoring of its operations, development of a management information framework, reviews of the company’s repayment plans for depositors, the option of administration and business plan under public ownership | 3.3 | 1.0 |
Clifford Chance | Engaged by Bank of England to provide legal advice | 1.9 | 0.5 |
BDO Stoy Hayward | Appointed in September 2008 to assess any compensation payable under the Northern Rock plc Compensation Scheme Order 2008 |
| 4.5 |
Other Advisers |
| 1. 4 | – |
Total |
| 16. 5 | 10.3 |
Source: HM Treasury | |||
4.16 Goldman Sachs was appointed following a limited competition. In late September 2007, the Treasury invited three investment banks at short notice to discuss their services with a panel of senior officials. The Treasury selected Goldman Sachs on the basis of its understanding of the Tripartite Authorities' objectives and the firm's expertise in corporate restructuring. The firm was appointed to provide the Treasury and the Financial Services Authority with analyses of the options available for Northern Rock, strategic advice concerning potential bidders and lenders, as well as input into the issue of State Aid. This procurement approach was consistent with European Union public procurement regulations, which permit the use of a single tender procurement in the context of unforeseen events where there is insufficient time for a full procurement exercise.
4.17 Although Goldman Sachs commenced work in September 2007, a letter of engagement was not signed until 2 November 2007. A fee structure was not agreed by the Treasury until January 2008. The agreement included a retainer amounting to £300,000 a month plus a success fee of up to £4 million. The latter, however, did not specify what might constitute "success" in what was a complex and evolving situation. The Treasury and Goldman Sachs eventually agreed a fee based on:
Advice on the financing plan which would have involved an issue of bonds by the company backed by a Treasury guarantee | £2,000,000 |
Retainer (£300,000 a month for six months) | £1,800,000 |
Expenses | £50,000 |
Total | £3,850,000 |
4.18 Ernst & Young was engaged by the Bank of England, after assessing the suitability of three firms of accountants, to provide advice on the financial position of Northern Rock, review depositor repayment plans and examine potential implications of administration. The initial engagement lasted until 12 October, but was extended to cover the period up to 12 February 2008 to provide ongoing monitoring of Northern Rock's business. The relationship was primarily with the Bank of England, but the advice was shared across the Tripartite Authorities.
4.19 A cost recovery deed was signed by Northern Rock in October 2007, providing indemnities to the Treasury and the Bank for costs incurred in assessing and responding to issues relating to Northern Rock. Northern Rock agreed to pay any expenses incurred from 10 September 2007 onwards. The Treasury also provided the Bank with a separate indemnity covering its fees. Since February 2008, the Treasury has required further legal and financial advice from Slaughter & May, Ernst & Young and Goldman Sachs.