Assets and Liabilities Committee (“ALCO”) Terms of Reference September 2012

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1. The terms of reference detailed below set out the scope and objectives of the ALCO.

Approval 2. The Terms of Reference of are approved by the GRC each year and

were last approved in September 2012. The formal annual ratification process is carried out as confirmation that the Terms of Reference are still appropriate and up to date.

Membership

3. The ALCO shall comprise the following members, which will be

decided from time to time, by the Group Risk Committee.

a. Chief Executive (Chairman) (Jim Willens) b. Finance Director (Angela Russell) c. Treasurer (Peter Green) d. Group Risk Executive (Patrick Ferguson) e. Senior Sales and Marketing Executive (Steve Urwin) f. Balance Sheet Manager (Duncan Fitzpatrick)

4. Meetings will normally be attended by a. Treasury Risk Manager (Sarah Warren) b. Product Development Manager (Ian Welsh)

And may be attended by c. Head of Product Development and Direct Distribution (Stuart

Fearn) d. Corporate Development Executive (Steven Marks)

5. Other professional advisers, Society managers and staff may be invited to attend depending on the agenda to be discussed.

Attendance at Meetings

6. For a quorum to be established, a minimum of 4 of the above

members must be present. Either the Chief Executive or Finance

Director must be present for a valid quorum. In the absence of the Chief Executive the Finance Director will act as Chair.

7. The meeting will normally be attended by a Non-Executive Director

invited to the meeting, that Non-Executive Director determined by the Board. Any Non-Executive Director may attend an ALCO without invitation.

8. The Head of Business Assurance may attend meetings without an

invitation. 9. The members as outlined above should normally attend meetings.

Members of the Committee may nominate a deputy to attend an ALCO meeting in their absence, but that deputy does not constitute a member for the purpose of establishing a quorum.

10. Where a meeting is convened solely to discuss and approve product

pricing proposals then the Terms of Reference for the Product Approval Committee are appropriate.

Frequency of meetings 11. Meetings should be held not less than on a monthly basis with 12

meetings each year. Meetings held solely to discuss Product Pricing will be held on a more regular basis where the Product Approval Committee terms of reference are appropriate.

12. The Chief Executive or Finance Director may convene a special

meeting of the Committee, if in their opinion an issue arises that cannot wait until the next regularly scheduled meeting.

Authority ALCO has authority to make decisions on all areas identified within the Responsibilities section of this Terms of Reference, but at all times operating within the Treasury Policy Statement as it applies to those Responsibilities.

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Responsibilities 13. The purpose and objectives of ALCO have been established as

follows:

14. Treasury Risk Management

a. To consider, review and make recommendations, at least annually, on the Treasury Policy Statement;

b. To monitor activity and controls underpinning the Treasury Policy Statement to ensure adherence to set policies and limits; and

c. Consider treasury dealing strategy and holdings against the risk appetite set for Treasury Risk Management.

15. Asset and Liability Management

a. To review and manage changes to the Society’s balance sheet, including structural changes and achievement of strategic objectives in relation to growth or shrinkage; and

b. To recommend types of products and treasury instruments with an appropriate duration and interest rate to manage the overall balance sheet structure. Product recommendations are subject to the Terms of Reference of the Product Approval Committee.

16. Interest Rate Risk and Hedging Activity

a. Monitor, in accordance with the Treasury Policy Statement,

the use of interest rate derivatives used in the management of interest rate risk including any periodic restructuring to the interest rate derivative portfolio;

b. To consider and agree the Society’s interest rate view and changes thereto based on changes to the economic outlook and interest rate environment;

c. Monitor compliance with limits in the Treasury Policy Statement for the management of market value risk and

earnings risk in relation to the agreed interest rate view, including inter alia the impact of a 200bp shock;

d. Monitor the impact of basis risk on the net interest margin and authorise mitigating actions including the approval of basis risk swaps;

e. Monitor the impact of early prepayments and their effect on market value and earnings risk;

f. Consider actions to be taken on un-hedged positions and the use of natural balance sheet hedges, including the approval of equity release swaps;

g. Review information submitted to the FSA in respect of interest rate risk, including FSA017, the interest rate gap return; and

17. Treasury Credit Risk a. Review on an annual basis the authorised list of treasury

investment counterparties or more regularly where market conditions require;

b. Consider and recommend changes to the Treasury Policy Statement in respect of credit and counterparty risk, including country limits, instrument limits, counterparty limits, large exposure limits and regularly review the relevant controls in place to ensure compliance with these limits;

c. Quarterly review of RMBS and covered bond holdings; and d. Consider the impact on the counterparty list and to the

management of existing exposures for ratings agency downgrades or adverse market commentary. Approve actions where an existing counterparty no longer satisfies the requirements of the Treasury Policy Statement (where an action is agreed by ALCO that falls outside of the Treasury Policy Statement then e-mail approval will be sought from GRC members where an immediate action is required).

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18. Funding

a. Review sources of funding, identify and assess the impact of new sources of funding, change in profile of sources of funding and review all funding limits for compliance with the Treasury Policy Statement;

b. Review the balance between the funding and lending plans, ensuring that the lending plan is compatible with the funding plan;

c. Review overall cashflow position as shown by the weekly cashflow report and consider the impact of other inflows and outflows as they affect overall liquidity e.g. large retail maturity outflows;

d. Review and consider the impact on the Society’s funding position of any “market news” or ratings agency action in relation to the Society;

e. Discuss and approve stressed funding scenarios; and f. Review and approve the Society’s contingency funding plans.

19. The net interest margin and profit performance

a. Review interest margin trends including forecast position, and the variances from the planned net interest rate margin, and detail any required actions as appropriate. This includes reviewing adverse and positive movements in pricing; and

b. Monitor the impact on net interest margin, reserves and profit from changes in the market value of liquid assets, derivatives and embedded derivatives under IAS 39.

20. Liquidity

a. Review changes in the profile of liquidity and compliance with

all liquidity limits set out in the Treasury Policy Statement, ensuring that full consideration is given to items that may have become less liquid in more volatile treasury markets;

b. Consider the scenarios modelled as part of liquidity stress testing and identify additional scenarios based on best

practice and FSA pronouncements (including new liquidity requirements). Such changes require the ratification of the Group Risk Committee. Consider changes to liquidity profile following review of the monthly stress tests; and

c. Review of reports submitted to FSA on liquidity including key Regulatory Reports.

21. Strengthening Liquidity Standards - ILAAP

a. To review on an annual basis the Society’s ILAAP including

changes to stress testing methodologies, compliance with systems and controls requirements and other requirements of chapter 12 of BIPRU; and

b. To agree the decision tree for the split of Type A/B funding and any changes thereto.

22. Product Pricing

a. To monitor the Society’s savings and residential mortgage

market trends and its relative competitive position; b. To review and approve annually the Terms of Reference of

the Product Approval Committee; c. To oversee through the Product Approval Committee the

monitoring and approval of changes to the Society’s fee structure;

d. To oversee through the Product Approval Committee authorisation of new savings and residential mortgage product proposals, the latter in accordance with ROCE benchmarks set, incorporating the costs of liquidity and cost of funds premium; and

e. To review and approve changes in interest rates on savings and residential mortgage products, following a base rate change or for any other reason.

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23. Other Matters

a. Decide upon appropriate recruitment, training and

development for ALCO members, senior management, audit and treasury personnel to ensure the requisite skills are available to monitor and control risk;

b. Consider results of business assurance reviews, feedback from external auditors and any other regulations/pronouncements/correspondence from external bodies including, inter alia, the FSA and BSA;

c. Review compliance with Specialist Sourcebook for Building Societies and BIPRU including the approach to be taken for treasury risk management and identify management actions required to address gaps;

d. Review compliance with specific guidelines issued by the FSA as they pertain to ALCO activities e.g. Dear CEO letters and results of thematic reviews; and

e. Review of treasury performance. Committee Evaluation

24. To ensure that a formal evaluation of the effectiveness of the

Committee is undertaken on an annual basis. Communication 25. The Secretary of ALCO will normally circulate the agenda and papers

for meetings at least three days before the meeting. 26. Formal minutes, approved by the Chairman of ALCO, shall be

submitted to the Group Risk Committee following each meeting of ALCO.